Friday, August 11, 2017

Dead Cat Bounce

Not much to write about today except a 3+ point "dead cat bounce" in the S&P500 Index, so far. Looking at today's structure in live chat, there is no clear "ending pattern" such as a diagonal or triangle (fully formed) at the lows, yet. So, lower lows are possible.

The weekly candle was confirmed to be a "key reversal candle", and probable many people wanted to lighten-up before the weekend. Volume today, on the slim up move, was lighter than on yesterday's down move. Also, declining volume beat out advancing volume, even though there were slightly more advancing issues than declining issues. But, there were more new 52-week lows than there were new highs.

Today's chart is of the daily E-Mini S&P500 Futures. The Bollinger Bands are widening to the down side, and this is the second settlement of the close outside of the lower band.

ES E-Mini S&P500 Future - Daily - Bollinger Bands Widening

We note the 18-day SMA or "line in the sand" is beginning to curl lower, and if it were random chance (which it's not) each day has about a 5% probability of closing outside of the band. So, as each day progresses - as a very rough approximation - you can knock off 1% from that. So, with two days outside of the band, 5% - 2% = only 3% chance for Monday of closing outside of the band.

That's if it was by random chance. But, we know the stock market does not have a typical "normal" distribution like a Bell Curve. In fact, the stock market is known to have a "fat-tailed" distribution. That means that larger price changes happen a little more often that they should otherwise.

That is, in the nut shell, part of the mathematical reason that Elliott Wave counting works. Those larger sized price changes make for big third waves, and big C waves.

So, be careful of the casual mathematics used to describe the chances of being inside or outside of the band. Right now, there is no sign the bands are curling in, and it is possible the 100-day SMA, the dotted green line, will become a price objective since the lower band has not provided support yet. Until then ...

Have a good start to your weekend.
TraderJoe

3 comments:

  1. Obviously you know your craft much better than many so I can't argue with neither your logic nor your skill of interpretation using EW theory. However, to me this feels and looks too orderly of a retreat to have been the market down signal everyone seems to expect as a serious correctio but very few could ancticipate its timing correctly. If I were a betting man, I would say to you that once the Wall Street geniuses clean up the floor mess they will shoot for a party ending the SPX in the 2530-2550 range. And then the real decline will begin. I could be wrong but that's how it feels to me.

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  2. Put/Call ratio now at April highs, just before the S&P rallied 3% two weeks later. Something to keep an eye on. Good call on the RUT! Mid to late Aug should be very bullish.

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    1. Looks like I will be right...big rally coming!

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