Here Is What We Need To Avoid A Bull Trap
The major indexes finished firmly higher last week, as
market players were able to put aside many of the worries which have plagued
equities over the last several weeks. Despite crude oil recording a
new all-time high and mediocre economic data, the market displayed optimism
about the future. This was evident in the performance from the beaten-down
Technology sector, which displayed relative strength for a change. A lot of the
strength in Tech shares likely stemmed from short covering, as sentiment became
pretty bearish towards the group on a short-term basis.
The
September SP 500 futures closed out the week with a gain of +32.50 points, while
the Dow futures tacked on +277 points. On a weekly basis, the ES held its lower
channel line and reversed back up through its 200-week MA. Looking at the daily
chart, the ES negated Thursday’s doji, with next resistance at its 50% Fib
retracement of the June/August down move at 1103. On an intraday basis, we
could see a retracement here off of 60-min and 30-min 3 Drives/AB=CD patterns
with bearish divergence. The YM reversed off weekly bullish divergence and is
testing its 50% Fib retracement of the June/August down move. The ER2 also
reversed off of weekly bullish divergence and settled above its 38% Fib
retracement of the July/August down move.
September
bonds (ZB) posted a weekly doji and market structure high at the 78.6% Fib
retracement of the year’s decline, and are trying to break the daily bearish
wedge. The Semiconductor Index (SOX) posted an inside weekly market structure
low, and overall, was pretty much of a laggard throughout the week.
The
long-awaited summer rally may have finally started, but it took a deeply
oversold intermediate-term condition and a drop in bullish sentiment to generate
upside action. Equities apparently reached a point where a lot of bad news was
already reflected in their prices. Also, many of the weak holders likely were
shook out, while short sellers probably overstayed their welcome. These
conditions together triggered the move up, just as it appeared as if a serious
break to the downside was about to occur.
Overall
breadth during the advance has been healthy, but volume has not yet confirmed
the price action. The lack of volume likely has to do with the seasonal slow
period of late August, but, the lack of volume also suggests that large
institutional investors may still lack conviction from the market action.
Consequently, it’s critical that heavier volume starts to materialize,
otherwise, the recent action could be setting up a “bull trap”.
Program Trading Levels
Fair Value – (.21)
Buy Program Premium – 0.65
Sell Program Discount – (1.10)
Closing Premium – 0.35
Closing Bias – If the futures gap down at the
open, watch for a retracement up towards the gap fill.
Please feel free to email me with any questions
you might have, and have a great trading week!
Chris Curran