Chart Analysis
Yesterday the market closed sharply down. In the ESH15 chart below we are showing the OVERSOLD situation, based on our models, on three different time periods: DAILY, WEEKLY and MONTHLY. The values in the gauges at the bottom of the chart represent how much the market is oversold at the price level indicated under the “BUY” arrow, for each time period analyzed.
How to read this? Pretty simple:
– the DAILY time period shows near certainty of reversal between its current position and the 1959.50 level.
– the WEEKLY time period shows good chances of reversal at the 1971.75 level.
– the MONTHLY time period shows as well good chances of reversal at the 1968.50 level.
Since the WEEKLY and MONTHLY levels indicated have oversold values <100%, we must say that the market certainly can go lower on these time periods (after the imminent DAILY bounce), but in any case the odds to see a medium/long term reversal from these WEEKLY/MONTHLY levels are quite good (=a good chunk of this correction is already behind us, in case you are thinking this is a great time to go SHORT… you’re late).
TO GO LONG
CCOC – Consecutive Closes Odds Calculator (TIME EXTENSION ANALYSIS)
The TIME EXTENSION ANALYSIS model below shows how many consecutive lower closes (bars) we had on each time period and puts this information in a statistical context.
The DAILY time period gauge shows “2” days down. 74.31% of the events recorded in history are scenarios where the market closed up after 2 days down.
The WEEKLY time period gauge shows “0” weeks down.
The MONTHLY time period gauge is showing “1” month down (registered at the end of December), and we can see that 62.50% of the events recorded in history are scenarios where the market closed down 1 month and then the next month is closing up. This means the odds would be slightly tilted in favor of this month of January closing up, on average. If January closes down we will have “2” months down and a strong MONTHLY LONG setup (more than 80% of the events recorded in history are scenarios where the market closed down no more than 2 months in a row and then the next month was closing up, so this in theory is a bullish reading for February).
RL – Retracement Levels Odds Comparator (PRICE EXTENSION ANALYSIS)
The PRICE EXTENSION ANALYSIS model below shows how far a price retracement (downtrend) can go on each time period, based on the statistical analysis of all the historical retracement patterns that share similarities with the current retracement pattern.
The DAILY time period offers maximum support at the 1959.50 level (highlighted below) a bounce from this area is almost certain: nearly 100% of the events recorded in history are scenarios where the market does not go lower than this level during this type of retracement pattern.
The WEEKLY time period offers good support at the 1971.75 level (highlighted below). 55.71% of the events recorded in history are scenarios where the market does not go lower than this level during this type of retracement pattern. This level is the best possible match for the 1959.50 DAILY support.
The MONTHLY time period offers good support at the 1968.50 level (highlighted below): 52.50% of the events recorded in history are scenarios where the market does not go lower than this level during this type of retracement pattern. This level is the best possible match for the DAILY and WEEKLY levels indicated above.
The big gauge on the right hand side of the table below shows that 69.40% of the DAILY+WEEKLY+MONTHLY (combined) cases recorded in history, are scenarios where the market does not go lower than these levels during this type of retracement pattern. Overall this is a good setup to go LONG.
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TO GO SHORT
CCOC – Consecutive Closes Odds Calculator (TIME EXTENSION ANALYSIS)
The TIME EXTENSION ANALYSIS model below shows how many consecutive higher closes (bars) we had on each time period and puts this information in a statistical context.
The DAILY time period gauge shows “0” days up.
The WEEKLY time period gauge shows “1” week up. 45.15% of the events recorded in history are scenarios where the market closed down after 1 week up.
The MONTHLY gauge shows “0” months up, although soon we may have a “1”, if January closes up.
RL – Retracement Levels Odds Comparator (PRICE EXTENSION ANALYSIS)
The PRICE EXTENSION ANALYSIS model below shows how far a price retracement (uptrend) can go on each time period, based on the statistical analysis of all the historical retracement patterns that share similarities with the current retracement pattern.
The 2004.75 DAILY price level (highlighted below) is where we have the first valid resistance: 55.76% of the events recorded in history are scenarios where the market does not go higher than this level during this type of retracement pattern. This level can be used to unload some LONG profitable positions (if you hold any), if you want to reduce risk in case the market tanks much lower after the bounce.
The WEEKLY time period offers no resistance at the 2016.75 level (highlighted below, this is our best WEEKLY match for the 2004.75 DAILY level). This means that the market can go much higher from a WEEKLY point of view. It will take a while before WEEKLY SHORT levels with good odds of reversal are reached: 2115.75 would be the first level to meet our validation rule (odds value =>40%).
The MONTHLY time period offers zero resistance at the 2053 level (highlighted below, this is our best WEEKLY match for the 2004.75 DAILY level), nothing can be said about MONTHLY resistance until we reach much higher levels. This means the market can go higher from a MONTHLY point of view, all the way to 2227, before encountering any serious long-term resistance.
Summing up: the market has started to go down again, we have to see if yesterday’s sell off was a temporary event, or the beginning of another leg down. In any case, as we have explained in the TO GO LONG section, even if the market goes down further, it shouldn’t be able to go down too much before reaching quite oversold levels. For now we keep our bias in favor of medium/long term LONG allocations at the levels indicated by the LONG model. If you are a short-term trader, there are more options available, to profit from current volatility, for example using the DAILY SHORT levels indicated below (2004.75, 2012.75).
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