Home > Commodities and Rates, Short-Term Trader > Looking For Yesterday’s Retest To Hold

Looking For Yesterday’s Retest To Hold

Yesterday, the question was whether the market was in the process of retesting last week's low or on the verge of making yet another stab lower to multi-month lows. The market didn't quite fill the gap from last week, however the S&P did manage to take back most of that gap the past couple of days before putting in a strong performance today.  Breadth was strong on the NYSE with 2647 stocks advancing vs 474 declining and the up/down volume ratio registered a very positive 19.7 to 1.

Total volume wasn't overwhelming, however; in contrary to popular belief the volume coming out of a major decline does not tend to register the high readings many pundits say should exist if indeed a bottom has taken place. You don't need to look any further than the last decline back in Jan-Feb where high volume trading did occur. However, once a bottom was in place there were a whole slew of "underperforming" volume days as the S&P 500 racked up double digit % gains into the end of April. (Don't get me wrong……I do not see this as the same type of buying opportunity as back in February, I just wanted to clear up a common misconception about reading too much into overall volume.)

Recently, these large skews in breadth measurements have become frequent while the indices have remained range-bound. This tends to occur near pivot points as market participants battle out their biases before ultimately resolving direction. This occurred in April just as the markets were carving out topping patterns………During the past couple of weeks I highlighted a number of indicators and studies which support the notion that the worst of the of the recent leg lower is behind us.

Here are recent links I have posted supporting a bullish bias:

Oversold Bounce Around The Bend-Breadth Registers Historical Readings

Stats On Price Reversals From A Multi-month Low 

More Bullish Data Suggesting A Sustainable Bounce On Its Way

The key going forward is that the market continues to make higher lows and higher highs. Yesterdays low of 1068.50 will be a key reference point for keeping the long side trade alive. Other risk assets such as the carry trade, industrial metals, and energy are all carving out this same 'higher-lower pattern'.  If these higher lows can hold then we should at least see 1120, and reaching up to the mid 1140's seems very plausible.

Es    
HS

A counter-trend rally up to these levels will carve out a very nicely shaped Head-and-shoulders pattern, which by now nearly every technician on the street has on their radar. However, before skipping ahead to that point we need to see to what extent the oversold rally can unfold. Ideally, as the S&P rises towards forming a right shoulder and at the same time investor optimism and internal indicators normalize and even extend into overbought levels. I view the right shoulder as a "sucker's rally" and as such it should draw in enough market participants that as the roll over commences there will be plenty of sellers to fuel the next surge lower.

The Euro (EURUSD) remains stuck in its descending triangle and should trigger very shortly. If risk assets can maintain the higher low put in place during the past 24 hours then a break to the upside becomes more likely. However, I will not speculate further until a break out of the pattern takes place.

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