I’ve had a lot of questions about the 5DMA Three Day Rule, particularly as SPX bounced yesterday, and I feel a need to explain my position here. This stat has somewhere between 40-60 instances since the start of 2007, and not one of those has failed to make target at the retest of the previous low, with 95%+ then making lower lows from there. Does this mean that I know that 1911 will be retested? No. Does this mean that I believe 1911 will be retested? No. I just consider that on the history, such as retest is very likely. No stat is perfect and one day this stat won’t deliver I’m certain. The odds of that being this time however are low.
Nothing is certain. No-one ever knows what will happen. If you need to talk to someone who can talk with certainty and belief about the future then you need to be talking to a priest rather than an analyst, and that priest is unlikely to be telling you where SPX or oil will close tomorrow. Everything about the future in the markets is a matter of relative probabilities until it happens. The probability of this stat failing here is very low, but absolutely not zero. Anything can always go the other way. Nonetheless on the balance of probabilities I am expecting to see that test. SPX daily 5DMA chart:
The bounce yesterday retraced slightly over 50% of the move down on Wednesday, forming a perfect rising wedge that broke down and completed an H&S pattern, that then broke down again. The target for that H&S is yesterday’s low at 1937 and I’m not seeing any obvious reason to think we won’t see that today. From there I’d expect a continuation down towards the 1911 test. SPX 5min chart:
I’m looking for an AM high that fails again today, as today is the other cycle trend day this week, are there are therefore 70% odds that one side will dominate the day. On this setup I’m expecting that to be the bears. I would add that I’ve been asked whether there is any time limit to the retest of 1911 and the answer is no. The stat is only that the last low 1911 should be retested before the last high at 1988 is broken. Given this very fast market though I’d expect the retest today or Monday.