The futures are shining a bright light on the last day of the week. Exorbitantly high put premium sold on Thursday will practically expire worthless today. The indices are bouncing hard from deeply oversold levels and can't possibly resume lower until the bull-bear equilibrium is reestablished. With an overwhelmingly high number of bears, there's practically no one left to sell. Hence, seller exhaustion is precisely the condition that leads to explosive short covering.
The charts below reflect my unbiased view of the market indices, totally based on well-known technical analysis principles.
Chart 1. The S&P 500 (SPX) traced out two classic chart patterns: a Broadening Top and a 3 Falling Peaks. Yesterday's low completed 'wave a' of the
second zigzag. A bounce back towards the low-to-mid 1960's will serve as a back-test of the 3 Falling Peaks' confirmation level (i.e., point C of the
first zigzag) and the lower trendline of the Broadening Top. If so, this will amount to a rough 61.8% retracement of 'wave a' that came to an end at
TDST on Thursday.
Chart 2. The Nasdaq Composite Index (COMPQ) completed a 5-wave rally off the mid April low. Thursday's session qualified as TD Buy Setup bar #9.
A bounce back towards the high of wave 3 and a flat 50-dma should set the stage for the next down leg, i.e., 'wave c' of the second zigzag outlined in
chart 3 below.
Chart 3. Another chart of the COMPQ. The picture is almost identical to that of the S&P 500 depicted in chart 1. It seems the indices' corrective chart
pattern of choice this time around is the 3 Falling Peaks. We're looking for a relief rally, followed by another leg down to complete a double zigzag.
Chart 4. The same goes for the Nasdaq 100 (NDX). Even though the chart shows a bounce up to the 61.8% retracement of 'wave a', the 78.6% level is
the more likely destination. This is illustrated in the chart of QQQ below.
Chart 5. This chart of the QQQ favors a bounce to the resistance cluster consisting of the 78.6% retracement level relative to 'wave a', the lower edge
of the open gap, and the supply line drawn across points 1, 2, and 3.
Chart 6. This chart of the IWM was published a few days ago, predicting a pullback to the AB = CD area on the condition that the mid-May low gets
breached. Thursday's low came within 25 cents of touching this ideal target. Since the charts of the aforementioned indices are foreshadowing
further downside on the heels of the current relief rally, the Butterfly harmonic pattern's downside target of 163.77 will remain on the table for now.
Trade well and good luck,
If you found my analysis thorough and useful, consider subscribing to 61point8.com's TradeWinds service for an ongoing analysis of the U.S. market indices and a steady flow of trade setups. As always, you will continue to enjoy my free contributions on Twitter and StockTwits by following @PeterGhostine. My StockTwits page is http://stocktwits.com/PeterGhostine.
The information in this article represents Peter Ghostine's own unbiased technical interpretation of the price charts and other data associated with the security or asset class in question. It does not contain an investment recommendation or offer to buy or sell any particular security. Please read our full disclaimer here.