Current Market Overview

What a week! Everyone got walloped; the S&P ended the week on the lows of a 130+ pt range.  Heads are still spinning, and the selling just won't stop.  What is pushing the market down, and is there any hope for a rebound?  Let's have a look at the day the selloff started (Tues) and work forward, all the way to the close on Friday.   While everyone was mesmerized by the frenzy that was "price action", such trading will be inevitably punished - it is my prediction that all new sellers this week are going to be eventually blown out of the water, S&P rally style.  Refer to the composite below as I make my arguments...

Get a clearer picture by directing the focus on value and references, not price

Let's go over the references to watch out for again:

• the opening print
• settlement
• 1/2 back the current range
• 1/2-hr bar highs/lows
• overnight highs/lows
• previous session highs/lows

With this in mind, we can immediately see problems with the downpush in each session, with them magnifying more and more as the week wore on and the market explored ever-lower prices.  In short, it wasn't strong, lasting money pushing price down - it was weak, panic money joined by short-term momentum and day traders.  Definitely not a good foundation to built a lasting trend upon - and an even worse one to expect to stay in place over time.

Tuesday: the session high is weak, because it is within one tick of Monday's high (which was also one tick within a previous high).  It was also poor in that multiple periods traded so close to the high of the day.  Definitely responsive, short-term money selling here off this very visual reference (see the next chart).

Wednesday: the FOMC minutes are released and the trading goes nuts - mainly day traders and robots pushing the market around in that volatility.  Interestingly, they go all-sell right at the previous day's settlement - another visual reference that is known to attract weak hands interest.

Thursday: If you were watching price, you were missing the bigger picture, as follows: A period high is questionable because it mechanically sold off of the overnight retracement high (after almost filling the gap), a very visual and weak reference. Then, B period sold off of the opening print (not marked on the chart), while C period only managed to make it to half-back before the weak money selling resumed.  From here, the market continued one-timeframing while building a very fat value area, each sell push down was bounced back up.  When they finally did take out the lows (bringing the market down to the 2043 area), price once again bounced back to that magnetic PoC - marked on the chart as well.  This kept continuing until the very end of the day, when price spiked down violently away from established value and the PoC, closing on the lows.

This is a huge warning - the market clearly established two-sided trade, value, and the fairest price during the overwhelming majority of the day in the 44-56 range.  The majority of the sellers were selling beneath the fairest price, and to spike away like that leaves them very short at very bad prices.

Friday: the high is actually strong for once (after almost filling the gap again), but don't get your hopes up - F period mechanically sells off half-back.  Very short from the entire week already, the market tries to repeat yesterday and establish a prominent PoC at 1995, and then spikes away again at the end of the day, getting themselves even shorter than the huge warning on Thursday.  Sellers from Thursday are feeling good, as are today's new shorts.

Yet, Thursday and Friday should be of great concern to any still short.  This is where the majority of the week's selling occurred, but none of it was very strong.  Looking at the market profiles, it's just wrong - it's too stretched out, too far-too fast, and the spikes away from attempted balance that are getting the market short-in-the-hole are all signs that this is way overdone.  Thursday in particular exhibits the 45-degree line market profile structure, which is a "structural pattern suggests that the odds against the short trade are increasingly turning against the position. (jdaltontrading.com)" Let's now consider the larger picture...

Compare the daily range on the last two candles on the daily chart to the average size of the other candles and you'll see they're just too large.  The market has gotten ahead of itself, and when it does that corrections tend to be on the horizon.  The pitifully small gaps (less than 3 pts each day) after a decent attempt to fill them don't bode well for sellside strength either (strong, convicted selling would slam it right on the open, also known as the open-drive day type.  Buyers wouldn't have gotten away with any attempts to fill the gap).  And of course, consider the liquidation's origins at Tuesday's high - you can now see how visual that area is - three different sessions touched it.  It's just screaming to be fixed!

So where to go from here?  Considering how fast the market fell apart this week, it's likely going to take a little time to reverse course.  A possibility I'm entertaining is a day or two of balance with failed attempts to go lower before the it dawns on the weak hands that they're not getting any more profit out of their sells.  Combined with some buy-side absorption and then buy-side aggression, they will be easily panicked into covering their shorts (many of which are at bad prices - short in the hole).

However, there is still some headline risk with the two Koreas sabre-rattling again over the weekend, so the possibility for more downside is still plausible.  Potential areas where my possible balance idea could manifest are marked on the weekly chart, with 1963 being the next batter up.

I've just covered the technical/chart aspect of the week's trade, laying out its poor foundation.  But fundamentally it's hard to make a case for such price declines as well.  What occurred this week again? Let's see - FOMC minutes were debatable if the big-scary rate hike of 25 bp will happen (as usual), another country (Kazakhstan) devalued its currency, crude oil took a huge dive, foreign markets declined, and... well, is there anything new here?  All these things have either happened before or are ongoing as part of the world we live in.  And if the market lives and dies by the Fed, everything else like emerging markets and crude oil prices becomes secondary anyway.

But why such a decline?  What if I told you that the run up to the liquidation's origins at Tuesday's high was also weak/short-term money dominated, after conducting a similar forensic examination of the sessions leading up to that moment?  Short-term hands buy it up, then sell it right back down... only to buy it back up again.  Seems the market is just a big game lately - indeed, most of 2015 has been a sideways range-bound trade - but with the information in the post, you're in a much better position to win it.