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Just Another Manic Friday

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Just Another Manic Friday
Austin Passamonte

An early dive and late day pop could not prevail directional bias either way. The recent rally from two weeks ago until today has been very impressive but not unexpected. A VIX spiked to 57+ told us the selling pressure was severe and subsequent bounce off such a multi-year extreme should likewise have emphasis as well.

But Thursday found some vigorous tests of near-term resistance fail to break and markets pulled back from there. What might lay in store for us next week and possibly beyond? Too many variables for me to guess with real confidence right now, but let's cruise some charts and try to form some scenarios to keep in mind:

(Weekly/Daily Charts: Dow)

Make no mistake: weekly chart stochastic values are poised for a bullish reversal up from oversold and we cannot forget that right now. Chances are very good for a fall rally to emerge once the next pre-warn season ends, subject to a nation at war of course.

Meanwhile we have daily charts over-extended and stalled out for now. I would expect daily stochastic values to cycle back down towards oversold extreme and up again one or more times while weekly signals make the complete trip from oversold to overbought failure in the future. Make sense? The best buy & hold entries will come when both time frames align together once more, and right now that would be bullish reversals from lower levels than present.

The 9,300 area would be very stiff resistance and a high-odds place to get short unless a bullish catalyst blasts price action right thru it. Trust me, that can happen. Let some good news like military victory or economic relief package pass in Congress and we could see that become a speed bump on the Dow's way higher.

Likewise the 8,500 area might be the next measure of support when daily-chart stochastic values move down and reverse in bullish fashion again. Fundamental news can also see that level smashed out with nary a pause if markets panic as well.

(Weekly/Daily Charts: QQQ)

The Nasdaq markets actually look healthier than the leading indexes do, relatively speaking. While weekly price action remains trapped in a persistent descending channel, we see signs of bullish reversal forming in stochastic values. Next week? Um... perhaps that's a bit early but late October is not out of the question. Get past (non)earnings season and I think we run to the upside until New Years. What after that? First things first.

Daily charts show the subsequent pullbacks on Thursday & Friday did so to support near the 20-DMA. Looks like the index reaches 33+ area before stalling out at that important point. The SOX chart (not shown) looks just like this of course, and I wouldn't short either of these right now (or the S&Ps) with a time frame of longer than a day unless/until ALL major index daily charts reach overbought extreme in unison.

(Weekly/Daily Charts: SPX)

SPX looks much like the Dow. Bullish weekly with 1171 area as an ultimate upside target as stochastic values begin bullish reversal right now. Daily chart action shows price action trapped between the 38% retrace and 20-day MA as well. We might see more consolidation between the measures before a decided break occurs either way.

(60/30 Charts: SPX)

Finally we have a shorter-term view on what to expect Monday. The 60/30 chart bullish stochastic reversal was either the most recent high-odds call entry or last gasp to trap market bulls before lower levels are tested. Stochastic values popped from oversold extreme and still have upside room to run.

The ascending channel continues to prop up price action over the past few days and hasn't failed yet. Next significant test for this index is Thursday highs of 1084 to hold resistance or break and become support. Not only is this a recent high, it is also the centerline value in the ascending channel as well. Failure to break above and continue higher would confirm our consolidation targets to the downside instead.

What 'n heck is that? Old bag of tricks I learned from the commodity world. The most recent consolidation up between 1080 and 1084 of Thursday has a center value of 1082. Friday's consolidation from 1053 to 1063 has a center value of 1058. Now, if Friday's action was a continuation pause it would measure half the distance from beginning to end of that particular leg. We can subtract 1058 from 1082 for a value of 24 points. If indeed 1058 is the halfway pause of this down move, we subtract 24 from 1058 to arrive at a bottom target of 1034 on the SPX.

Flip thru a pile of charts (any time frame, any symbol will work) and test this study yourself. Look at consolidations near highs or lows and see just how many times price action coils up midway from the next price turn ahead. In the current market's case it will be cancelled and negated if price action manages to break above Thursday highs, and that applies to all of the indexes or stocks respectively. I meant to use the OEX as example instead but got busy with phone calls, etc and stuck the SPX in by default. Do try this with all charts it applies to and watch what happens in the near future... we might be surprised where prices bounce from indeed!

Odds & Ends
We've seen up volume swamp down volume over the past few sessions which is very bullish. Trim Tabs report a significant inflow of cash this week but that's obvious by now. Higher lows are forming and dips are finding eager buyers. Weekly chart signals look ready to run and the next significant move will be upward as they indicate. Now the question remains when?

Many traders are still waiting to pounce on the first signs of weakness and short everything into oblivion. Many expect the next warning period to totally tank the markets or at best return to recent lows. Few believe a sustained upside move might grow legs and hold from here. Exactly the type of situation we last saw in late March & early April. The first significant selloff might have shorts diving back in and overstaying their welcome. For now we have a distinct change in sentiment and that must be respected. Keep in mind the herd is usually wrong at both ends of a move but correct in the middle.

I expect a pullback to lower levels soon myself. Probably the week after expiration as my luck would have it, and we usually see significant drops bottom out on that week quite often. Daily chart stochastic values suggest we go lower soon but that could be in stair-step fashion while chopping its way down.

We might as well prepare ourselves for plenty of volatility and unexpected market gyrations driven by every piece of news that crosses the wire. For gosh sakes please limit your capital exposure to much lower levels than usual. If we pick the direction right, volatility will rocket that play to bigger than usual gains to offset less capital at risk. If we pick the direction wrong, immediate loss will be manageable and survivable.

Both directions will be enjoyed or endured next week and most of them after that. How we feel about them will be a direction result of which side our trade is on. We'll do our best to get there more than not but capital preservation is paramount to success and survival right now.

Best Trading Wishes,

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