When almost everyone's leaning bearish, and hardly anyone's left to dump their holdings, selling pressure quickly subsides. As a result, waning downward pressures alone are enough to precipitate a strong wave of short covering. On Monday, we were on the lookout for that special tipping point, and when we got our chance during the afternoon hours, we took it. However, we carefully trailed our position and decided to abandon ship with a modest profit or at breakeven. The fact that the S&P 500 ($SPX) managed to breach its intra-day low by as little as 4 ticks just minutes before the closing bell got me convinced there's clearly some residual downside to be exhausted before the window opens for some month-end window dressing into the July 4th weekend.
My short-term view (i.e, for the rest of this week) is expressed in the following charts.
Chart 1. The $SPY Open Interest graph reveals the $200 and $205 levels as the crucial battle lines for the bears. Maximum damage will be incurred if the $SPY should close in on, if not exceed, the $205 level by the end of the week. Nervous sellers are likely to dump their puts quickly once they come to realize the market is moving against them. Market makers buying back those puts will also be forced to hedge their positions by buying the market (i.e., to achieve Delta neutrality), causing the market to rally even further. Profit taking will likely take hold on Tuesday morning, but buyers are likely to materialize on a retest of the $200 level. Last Friday's vPOC is at $205.10. A move above 203 would increase the odds of retesting $205.
Chart 2. The S&P 500 ($SPX) traced out an AB=CD pattern that ended at the [1.618 - 1.764] extension. This naturally came on the heels of a 5-wave rally that began back in February. How much of a partial pullback (i.e. profit taking) is to be expected is usually up in the air. The market could easily resume higher from here, or trace out another AB=CD pattern on the back of the relief rally that we're currently witnessing. As depicted in the chart, there's a bullish SHARK harmonic pattern whose PRZ (i.e., potential reversal zone) is in the 1909-1916 area. In the meantime, we will look for an entry point in hopes of partaking in this relief rally.
Chart 3. The Philly Semiconductor Index ($SOX) appears to have reached the bullish SHARK PRZ. I'd be watching this index very closely during this rally, in search of clues as to whether this is just relief or something more persistent.
Chart 4. The Dow Transports ($TRAN, $DJT) appear to have some unfinished business, no matter what pattern you favor, the HS top or the green BAT harmonic.
Chart 5. Likewise, the NASDAQ Banking Index ($BANK) appears to have some unfinished business.
Chart 6. Finally, the $VXX. A similar pattern (i.e., a bullish SHARK) helped us time last Friday's 'Black Swan'. A smaller-degree version of the same pattern is now unfolding on this 10-minute chart. While the path to [15.16-15.28] may not be a straight line, I suspect rejuvenated selling pressure will materialize upon reaching this downside target.
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