Sucker Punch

SPX moved straight up through resistance at the daily middle bollinger band on Friday and closed well above it. On my standard view, given that there are no major moving averages above SPX , the next target is the daily upper bollinger band, currently in the 1728 area. This backs up the falling megaphone target back at 1729.86. SPX 60min chart:

So that just about wraps it up for the bear case before we see a test of the highs ......... or does it?

There is a very rare reversal setup that we could be seeing form here, given the very large opening gap downwards, and it is a two candle daily chart setup that I have decided to call the 'Sucker Punch' reversal setup. The first daily candle, moving up from a recent hit of the daily lower bollinger band, breaks back well above the middle bollinger band, and triggers the next target at the upper band. Bulls settle back complacently while bears despair. On the following day there is a punch back and close well below the middle bollinger band with a candle that is significantly larger than the first candle. Since 2003 there have been four only instances of these and what happened after those was as follows:

June 2006 - Reached daily lower BB the third day after the punch back down
Oct 2007 - Reached daily lower BB the day after the punch back down
May 2011 - Reached daily lower BB the day of the punch back down
June 2013 - Reached daily lower BB the day after the punch back down

All of these were rally highs within continuing downtrends where strong rallies were followed by even stronger declines. We aren't necessarily looking at one of those here, but I'm going to be watching the close carefully today to see whether this is a Sucker Punch reversal setup. If there is a close under 1685/6 today then history suggests that the 1646 low would be taken out this week and very possibly tomorrow. Given the headline risk situation this has to be considered as a significant possibility here. SPX daily chart:

On the SPX 5min chart a rising wedge from the low broke down on Friday and made a DTR (double-tap reversal) trendline signalling a reversal. What springs to the eye on this chart is the 1685/6 area, and I think this is a very key support area today. SPX 5min chart:

On the ES 60min chart the globex open gapped below rising support from the low and an H&S is now mostly formed. ES is testing support at the 50 hour MA in the 1686 area, and if that breaks with any conviction the H&S neckline is in the 1680 area with a target on a break below in the 1660 area. That 1680 neckline area is just above the 1685/6 support area on SPX of course. ES 60min chart:

If we see a break and close below 1680 today then history strongly suggests that last week's low would then be taken out this week with a strong resumption of the downtrend. Be cautious buying that dip.

I get asked regularly where I spend my time during the trading day and like many traders I spend the trading day in online trading rooms. I mentioned the room run by my friend Mike Vacchi a few days ago and the other room I run side by side with that is MarketTalk with Eubie (Stephen Eubanks) at thehammerstone.com. Eubie is a specialist in reversals and totally nailed the low on Wednesday so a shout out to him this morning. Here is some of the chat at that low:

eubie (10:54:20 AM): <1645> FAILED AUCTION ALERT
eubie (10:59:58 AM): Bollingers STRAIGHT DOWN 1645
eubie (11:01:46 AM): 1645 THIN CHOWDER STIRRING (thin chowder = significant reversal)
michael_vacchi (11:02:01 AM): ES lower level 1644
eubie (11:13:12 AM): I'm SWING LONG 1644/45 & trading around
eubie (11:24:12 AM): another FAILED AUCTION ALERT 1640
eubie (11:24:37 AM): this has gotten BEYOND ridiculous here
eubie (11:25:56 AM): VIX highs +4.92% @ 21.34 / SPU 1641
eubie (11:30:27 AM): DJIA sitting on 200-day / RESPECT IT http://screencast.com/t/1Nlp136uTES0
eubie (12:39:15 PM): by the time you would see +1000 tics ya be at 1650-51
eubie (01:18:09 PM): +1043 tics @ 1651.50

I've been remiss at updating my blog with links to these guys but will be adding both today.