Bounce??!!

Sharing is caring and in this spirit I wanted to share some technical insights into this week’s market bounce following the aggressive flush down last week.

As of late I’ve been hearing more and more people throw their hands up in the air and declare that technicals no longer work in face of some of the historic price action we’ve witnessed in markets in the past year. It’s all about printing I hear. And it’s true we have distortions in markets and broken relationships courtesy of central banks printing.

After all, liquidity injections have consequences according to Fed governor Kaplan:

Dangerous truths his boss Jay Powell continues to deny, as yes, the Fed is partially responsible for the current stock mania:

Best to just keep printing and make the mania and wealth gap even worse.

Yet despite all the distortions the market offered a technical master class this week and the precision of it all is something to behold.

Let me explain.

In my experience confluence of multiple factors interjecting at the same time often prove to be the most important tools for technical traders to assess shifting risk and reward and identify key price pivots. It’s akin to finding all the various puzzle pieces and sorting them for relevance.

And what happened Friday and into Sunday night in futures trading was monumental in this respect as multiple key factors came together at exactly the same time.

First off we knew about about one key pivot in advance, it was the basic 50 day moving average reconnect that was overdue and it was the playbook from the year 2000 that called for a 50MA reconnect by the end of January, something I’ve discussed back in early January and highlighted again this weekend:

And indeed we got the 50MA reconnect into the end of January:

But why the bounce? Just because of the 50MA reconnect? No, there are a lot more factors at play.

One other key factor was the $VIX gap fill at 37, part of the very gap constellation outlined as a check list in December:

Gaps are key pivots and seeing $VIX fill the final gap on Friday suggested a counter reaction was lining up, and it did as $VIX reversed precisely from there:

That gap filled on Friday, but Sunday night futures dropped further. Why? Another important check point was ready to be ticked off, a key trend line tag and I highlighted it as a key save or break moment at the time:

And the save reaction off of the trend line has been impressive:

If we zoom in on the daily chart we can note not only the precision of the trend line tag, but also the supporting confluence with the November 9th highs and the early January lows:

This is as close to a technical bulls eye as you get.

So in summary: We had a 50MA tag, we had the final $VIX gap fill, a trend line tag while intersecting with a previous high and a previous high turned support level.

In short: 5 points of confluence interjecting virtually at the same time. And not only on $ES, but also the $DJIA hitting the same support level at the same time:

And now the bounce precisely off of that support zone:

I offer all this to highlight how the bounce from these levels has made perfect technical sense. Without understanding these technical puzzle pieces one is flying blind and I submit it is abundantly clear that markets continue to respect technicals and hence traders must as well or get caught offside in a major way. This applies to the buy side as well as to the sell side.

In terms of what is next: Gather your puzzle pieces. The 2000 example says new highs. The current technicals say show me as the battle for price control is ongoing and new highs haven’t been made yet, hence it is critical to understand the price pivots that determine who is in control and when.

Bulls have managed a sizable bounce off of key pivot support confluence. Now sustained new highs are needed for any further downside would risk a break of the now confirmed rising trend line of support. As long as this trend line holds this rally is intact, but should it break the nature of this market could changed profoundly and rapidly. Our job is to continue to evaluate to evolving picture and react accordingly.

What is clear for now is that markets just offered a technical master class and a teaching moment for participants.

Authored by Sven Henrich via NorthmanTrader.com