Bottom Re-test Status

Yesterday in pre-US market, we noted the big picture of the S&P 500, which is technically bearish on the intermediate-term and still up trending on the long-term.  We also reviewed the status of the short-term plan, which is for a re-test of the lows…

“Today looks like a market bounce is brewing, but recall that we are expecting volatility as Q3 ends and the ‘scary’ month of October begins (with sentiment down the drain, no less!).  It is a contrarian setup for a rally, which can begin now with the pre-market pump or after some ups and downs in the coming days if the lows are repeatedly tested.”

This morning markets are positive with the reason (according to the media) being China factory data, which ticked all the way up to 49.8 in September from 49.7 in August.  Yes, that is sarcasm, but the point is as we have noted, market sentiment is like a tinder box now, it contains the elements to ignite.

So are yesterday and today a whipsaw to start October, with the month’s bad reputation still waiting to assert itself before a real rally gets going?  It is hard to say.  Let’s use a daily chart today to see what we can see.

The price has declined far enough to be called a short-term bottom test.  The orange channel will be broken today if price follows through on pre-market indications.  As noted, some indexes have been relatively weak on this test (Russell 2000) and others relatively strong (Dow, SOX).  The point is that we have qualified for a re-test so any bullish activity now in process should be respected as potentially being the start of a significant bounce.

spx

SPX has gone trend positive by AROON.  Those wanting to play it safer in their assumptions about a bounce might wait for a cross above 20 by the STO 14,3.  The chart also shows positive divergence by MACD and RSI, which you would like to see in projecting a bottom and/or bounce.  This is even the case on the RUT, which unlike SPX has made a lower low.

rut

Bottom Line

This market is setting up to bounce.  We noted yesterday that it was possible that the bounce was starting.  If today follows through and closes strong (always a question in this volatile market) we would begin to cement that prospect.  The chance of a whipsaw and more downward testing is still in play, however.

I made what now looks like an unfortunate NFTRH+ post on the short-term view of SPX.  It looks like that short trade is about to get zonked, if it even ever got off the ground for anyone other than me (by the time it was posted and emailed, SPX had already broken its parameter in poking above the downtrend channel).  Also noted was that against this, I would probably be adding ‘bounce’ positions, which I also did.  Healthcare ETF IYH and favored Biotech company GILD were added, to go along with the relatively strong Semi company, SIMO, which was bought earlier in anticipation of a coming bounce.

This is not easy, because the whipsaw potential is there.  I may let it breathe a little before I book my loss (shorting SPXL) and move on.  But I continue to think that a bounce is coming, if it is not already here.  There has been and still is potential for lower levels (even down to SPX 1700 on this phase) so it is advisable to be on the look out as well, that this could be a bull whipsaw/trap.  But as of now, the bull case seems to be taking the upper hand.  I hope by laying out valid interpretations this at least gives us some healthy perspective.