I got a question today about why the 38.2% retracement level is so important, as I had mentioned yesterday that 1060 is the 38.2% retracement level for the entire bear market. This 38.2% is an important Fibonacci number, or market "harmonic".
These Fibonacci relationships seem to crop up in many natural systems. For reasons which are probably beyond the scope of our little minds to understand, the chaotic universe tends to organize itself around numerical and harmonic relationships. And the market, after all, is just another natural system.
The why of the number isn't really as important as recognizing that markets do actually tend to organize around these harmonic levels. Some technicians posit that these harmonic levels are important because so many people think they are important; that is, there is a self-fulfilling component at work. But that's maybe a little too glib. I think there are actual reasons behind the importance of these levels, even if these reasons are playing out underneath our conscious thought.
It's my suspicion that these numbers are important because emotions start to come into play at these levels. If you are in a position that is not going your way -- or even going your way -- there are certain breaking points where the market forces you to act to relieve the stress, whether that stress is taking a loss or protecting a profit. I think these breaking points tend to cluster around these important harmonic levels, as masses of people react to the swings up and down in the same basic ways. There is some sort of group emotional harmony playing out at these critical points. Anyway, that's my theory, such as it is.....
But really, that's neither here nor there. The bottom line is these numbers are valuable. There are even entire schools of market research (Elliott Wave) based principally on these harmonic relationships. There's just no denying that these harmonic levels reveal much about the market's tendency to seek order among seemingly chaotic movement.
Speaking of chaos, yesterday they "sold-the-news" off the Intel report, after the opening pop stretched to SPX 1053.79 -- just a whisker away from the 1054 level I've been watching. (Note: If you were still long the hedge off that busted short at 1024, that trade should now be over, as I had been specific about blowing out that position into just such a spike towards 1054, particularly on a bullish open.)
The market has now tickled the underside of that last remaining weekly breakdown point, and if the bear market is going to fire up once again, then now's a perfect spot for it to do it. 1054 would be an ideal place for a lethally tricky bear market to reject higher prices, and collapse back down quickly from here. The gap up and drop yesterday was actually pretty ideal for just that scenario.
But the key is follow-through. The S&P 500 index should make a bee-line back down through 1040 now, if yesterday did indeed mark an important top.
Such a swift move is a tall order, however, as we're heading into the final two trading days for October options. Most of the time, the last two trading days of an options cycle are just congestion and noise, even though they carry an undeserved reputation for volatility. Maybe 2 or 3 times per year will you see sudden streaky price movement this close to expiration. So the odds are we'll hang up here, and the "real" market will not show itself until early next week.
And yes, I'm still looking for the hourly fractal dimension to start a downtrend -- or at least fully exhaust an hourly uptrend -- before jumping into any short-term speculative short positions (which could potentially morph into mid-term positions). I'd also like to see both the VIX and VXO cycle into short-term decline phases at the same time -- which will make our Sentiment Tank move with some vigor off its zero readings. We don't have any of those things quite yet.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Filled by 0.7 points to 0.7% full of negative sentiment.
SHORT-TERM: Moved from an advance phase into neutral.
MID-TERM: Progressed 6 points to 87% on the advance side with Confidence regressing to 0. Where this gauge had been knocking off 9, 10, or 11 points at a clip the rate of change of this measure of the rate of change is now slowing. That's the 2nd derivative.
LONG-TERM: Regressed a point to 79% on the advance side with Confidence regressing a point to a bullish 1. While the weekly gauge has turned up it's not following through...the 2nd derivative is pretty flat.
BOTTOM LINE: The Tank filled just a smidge with negative sentiment as the market could not hold its early "shot of love" from the Intel earnings report. It's not that the news isn't good. It IS good. But the recent market run-up has discounted an earnings orgy and this stock market is ripe (oh, so ripe) for profit-taking just as we turn the corner into (ominous silent-movie chord on the Wurlitzer) the second half of October.
Our blowup of the tank above shows it pretty darn clearly.
A move below SPX 1040 throws the market back into an ambiguous situation of a potentially failed breakout.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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