Bulls are back with a strong reversal day after reaching the important support zone of the 61.8% retracement from the August lows. Bulls got excited after the announcement of the FED minutes last night and pushed the market higher as expected. As I have been pointing out so many times, the decline from the all time highs is corrective. The form of the decline does not imply long-term bearishness and that is why SPX and DJIA have reversed above their August lows and near the 61.8% retracement of the rise from those levels. Both indices have broken short-term resistance levels, something that they both could not do the last time the market reversed on October 2nd.
Both SPX and DJIA have reached important support levels that affect intermediate and long-term trend. The 1904 level in SPX and the 16330 price level in DJIA is the last stand for bulls. Both indices have managed to hold above those levels and only close around the 61.8% retracement from that rise. The strong bounces from that area is a good bullish sign now that we enter the Earnings season. So could this downward correction be complete or should we expect a deeper correction and a lower low than August lows?
In order for bulls to be more confident we need to see two things. Shallow retracements from yesterday’s lows and strong follow through. As you can see in the DJIA chart below, all the times we reached the same important support indicator and the middle pitchfork trend line, the reaction was strong (as it was yesterday) and we had continuous strong up days with shallow retracements.
A pull back in SPX towards 1960 and in DJIA towards 16900 should not scare bulls. Additionally the indices should provide signs of strength by breaking above the highs made on October 6th. Unless we see these signals bulls should be extra cautious because volatility has increased dramatically and the market does not forgive traders who do not use stops to protect their positions.
My view is that we have completed the downward correction and I give more chances to the bullish scenario and to see new all time highs in October. I remain long and I believe the 4th quarter has seen its lows. If I’m wrong, I have the stops to protect my positions.
As always, thank you for taking the time to read my new post.