With two successful tests and consequent bounces out of the key 1,290-1,295 level some are likely thinking the bottom is in. Why wouldn’t they? The bears had every chance to break the market below 1,295 on Wednesday but couldn’t as 1,296 proved to be the low of the day. One has no choice to respect the 1.6% bounce that followed, but that doesn’t mean you have to believe the bottom is in.
That’s not to say a short term tradable bottom is in, meaning traders can get long on dips near 1,300. Why 1,300? Because in our view, a break below 1,300 might as well be a break below 1,295. Much like our argument that a break below 1,357 weeks ago would pretty much automatically lead to a breakdown below 1,340 (we were right by the way, you can read our full analysis at the time here), there is nhttp://www.stockhaven.com/wp-admin/post-new.phpo reason to go back below 1,300 if a bottom is in.
So that begs the question, is the bottom indeed in? Our short answer is no. Here’s why:
1.) Recent history suggest that oil leads the market both higher and lower. Oil hit a new low today while SPX actually put in a higher low vs. its low from Friday. This is contradictory of typical bottoms which haven’t seen SPX bottom out before oil.
2.) The U.S. dollar closed over key resistance at $81.75 and is now trading at 2 year highs. The dollar appears to have broken out from a 2 year basing pattern and looks poised to move higher. Recent history shows an inverse correlation between the dollar and stocks which suggests that an extended rally in the dollar would weigh on stocks
Those are the two key reasons why we don’t believe a bottom is in. The thing we like about both of those indicators is we don’t have to wait to see how they develop, compared to waiting to see if key sectors/stocks can reclaim resistance levels. For instance, leading indicators like technology, financials, copper and the Dow Jones Transportation index are still marred below recent bases. We haven’t even seen these indicators test what were previous support levels to see if they become resistance. The problem with waiting to see how these charts develop is obvious, we have to wait.
The bottom line is we have to trust what has worked for us in past and that is by following the action in oil and the dollar. Some indicators will confirm bottoms after the fact but the best traders know how to confirm bottoms the day they are happening. When we see oil bounce 4-6% in 1-2 trading days, like it did when the market bottomed the first week of October, that’s when we’ll make our bottom call. At this moment though, just trade the chart and be ready to go short on any weakness near 1,340 that coincides with oil still remaining in a downtrend and the dollar in an uptrend.
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