Friday's gap lower in equities, after recording a slue of historical breadth and sentiment extremes, created a text book 'buy-the-down-open' opportunity. Something was amiss with the way equities were being punished pre-market, a disconnect was present.......After all, the Euro was up, metals were up, carry trades were stabilizing after a volatile night of trading and yet they were still taking equity futures out to the woodshed. These signs of strength in other assets were the silver lining for what had so far been a dismal week for risk.
To say the least, equities quickly responded and put in a very bullish day. Going forward, markets should be close to experiencing a recovery across the board. Global equities, metals, energy, and carry trades should all move higher together as the dance to the beat of "all-the-same-markets" continues. However, we should expect volatility to continue to be high as we remain a trader's market. In fact, even if were to violate Friday's low in the next few days I wouldn't be too quick to dismiss the notion that the worst of the decline is in the rear-view mirror - for now.
Support for the ES futures contract comes in at 1051 and then 1036, while near term resistance levels are set at Friday's close of 1084, then onto 1094, 1110, 1117, and 1125. There are a series of downward trend-lines to watch as well. There is a two day "Inverted-head-and-shoulders" pattern also resembling a triangle. Friday, we closed right at the neckline or top side trend-line of the triangle formation. A trigger above would allow for the possibility of a near term measured move of approximately 40 points sending the ES up to the 1120-1130 area.
Should the pattern in fact take hold as a bearish "4th wave triangle" then caution will be required on long trades and short trade will be in play. The decline from the triangle should be the end game for this current slide, for the time being. In accordance with Elliot Wave Theory, a "4th wave triangle" proceeds the final thrust of a decline before reversing higher.
In either event, the market is very close to confirming one of these scenarios and will likely be resolved by no later than Monday's close.
To be clear, I label the impending rally, whether it continues Monday or from another push lower, as a 'recovery' for I don't believe it will end up being more than just that. An oversold bounce, from a state of short-term capitulation - a re-balancing of the tape for what will likely set up as another 'short de jour' trade in the 2nd half of the year. I am currently working on a research piece highlighting my views on how events with unfold in H2 and will be ready for publishing sometime within the next 2-3 weeks.
Disclosure: Long June ES contract