The contents of this article are not financial advice. This article is provided for educational purposes only. Its author(s) accept no liability for its contents.
Bottom Line
/ES 4684 is critically important—above which I would expect new all-time highs to trade quickly (within a few sessions). That being said, /ES is clearly in a downtrend following the breakout below Monday’s inside day. Initiative long trades may potentially be very rewarding, but it is risky to attempt to time the bottom without proper risk management.
Review
During Friday’s session, /ES made an all-time high of 4711.75. This ATH happened during regular trading hours and was an excess high—these are the conditions I look for before considering a trend reversal in a market that is trending upward.
On Monday, /ES made an inside day: its high was lower than Friday’s high, and it's low was higher than Friday’s low. Inside days tend to provide a reliable trade setup: go with the breakout, but reverse your trade if the breakout fails. In the first 30 minute of Tuesday’s auction, /ES rapidly traded below Monday’s low at 4684. This level was retested from below about one hour later and successfully defended. /ES then started balancing below this level.
Several posters, including myself, noted the ominous b-shape profile from Tuesday’s auction. This often indicates a liquidation break as weak-handed buyers liquidate their positions and sellers fail to continue to bring prices lower. This allows buyers with more conviction to enter advantageous positions, which provides the momentum necessary to continue the auction upward. However, a b-shape could also represent initiative selling into consolidation—as seems to have been the case on Tuesday. Of course, this is actually bearish (at least in the short-term), so it is important to identify whether you are dealing with a liquidation break or strong sellers. The main thing I look for when attempting to confirm a liquidation break is value slowly migrating higher as the auction continues. Often, you will see aggressive selling, then a bunch of “chop” where the market just slowly grinds higher—for me, this is a great sign that a liquidation break is occurring. This was not the case with Tuesday’s auction and indeed, Wednesday’s auction confirmed that Tuesday was more than a one-off liquidation break.
Wednesday’s session appeared to be a bit of an emotional downtrend day. Interestingly, buyers stepped in near the base of the spike that happened last Wednesday (Nov. 3) after the FOMC release. This might have been the bottom, and a great opportunity to enter a swing long expecting new all-time highs. In my opinion, it is too early to tell at this point. Opening above the low-volume node at 4650 would be a good sign, but ultimately buyers will need to get above 4676 and 4684 before they are in the clear. Sellers who entered at those levels are comfortable at the moment, and still in charge until proven otherwise. Daily one timeframing lower is in effect; sellers must defend 4679 to keep this going.