How to Measure a Market Bottom or Bounce
It goes without saying that Tuesday’s historical rally was exactly that – historical. Not since a short squeeze of monstrous proportion on July 24th 2002 have we seen something similar. Some of us still recall that day’s behavior after having traded through it. In hindsight they seemed pretty much the same. That doesn’t mean history will repeat itself. Back then the ultimate lows ending that particular bear market came months later from (significantly lower levels) in October. Circumstances in financial markets are different now, for better or worse.
ES Daily Chart
Looking at the daily chart for S&P emini-index futures, we see where price action has rallied with gusto from the 1260 ~ 1270 zone twice. Has the makings of a double-bottom pattern here for sure. Measuring a common retracement bracket from recent swing highs to lows marks the 1331 level as 50% of that range. 1345 zone would be a 62% retracement of this hi/lo swing, which are two widely watched levels of resistance by the masses out there. Horizontal trendlines of resistance (not shown) also show these price magnets of congestion as relevant areas in the past. They are likely to be visited again, not to mention the open gap near 1360+ from late February.
NQ Daily Chart
Comparing the ES before with NQ above, we see where Nasdaq 100 futures have traded relatively weaker to the “old economy” index of S&P. Energy and commodity sectors have propped the ES while tech shares have been repeatedly pummeled along the way. Looking at the daily chart picture here, it doesn’t seem that much different from the late January squeezed ramp on option expiry Thursday ahead of the premarket interest rate “cut” deliberately planned for option expiry Friday.
That move marked a temporary bottom in all indexes which lasted until the retest this week. However, a sequence of lower highs trailed lower all the way through the time in between. Similar fate this time around? New market highs ahead? No one can predict, all of us can measure and react.
We’ll keep an eye on the major retracement levels and trendline resistance zones above. How price action responds to near-term tests of those common magnets will determine which way we lean on trades intraday. Rejection and failure = afternoon selloffs, while repeated testing of resistance early on tends to break through and rally into the afternoon much like we saw yesterday. Buying aggressively above resistance and shorting aggressively below the major marks will be our intraday bias overall.
Austin Passamonte is a full-time professional trader who specializes in E-mini stock index futures and commodity markets. Mr. Passamonte’s trading approach uses proprietary chart patterns found on an intraday basis. Austin trades privately in the Finger Lakes region of New York. Click here to visit CoiledMarkets.