SPX
I am currently trading in the Canadian weed sector (WEED.TO), which have been closely following the SPX. Planning trades successfully means paying close attention to SPX, because of how closely they are correlated. We have not seen such a substantial daily price drop since September 9th, 2016. Let's compare market conditions based on RSI, MACD, and price movement.
Friday, Sept 9th, 2016:
a) Daily RSI just hit 31.94, moments from entering oversold conditions.
b) Bearish MACD, with cross below the 0-line.
c) Gap down pre-market, and a -2.46% drop, followed by +1.81% rise the following day.
d) Friday sell-off, leading into the weekend.
Friday, Feb 2nd, 2018
a) Daily RSI 46.81, following a sharp cool-off from being in the overbought zone for all of January.
b) Bearish MACD, but above the 0-line.
c) Gap down pre-market, and a -2.54% drop
d) Friday sell-off, leading into the weekend.
e) On the weekly, we have just exited overbought conditions. Next week could be our chance to rebound to the upside, on our freshly cooled-off weekly RSI.
1) What can we predict, based on these observations?
Using the daily RSI, we can see that every time it has tested the oversold line, we saw an excellent bounce to the upside. We aren't quite there yet, but could easily reach the oversold line on Monday or Tuesday, depending on market action, and we'll want to be in our positions for it.
2) Will Monday open lower, and set the scene for another week of sell offs, or will we see a bounce?
The million dollar question. I believe that Monday will open lower, based on the momentum of last week, and drive prices closer to the oversold line, before sharply pulling back either midday Monday, or Tuesday on open. This is because bulls are likely waiting for a safe entry, and bears will likely resume in control upon open. Hourly RSI is oversold, so the countdown is on. The first 30-60 minutes of weak bearish momentum, coupled with buy signals coming from the heavily oversold hourly RSI could signal to bulls to enter. I am sitting on cash, and will plan my entry on Monday based on how the market opens, with either a strong gap down and heavy momentum, or a weak open leading to brief lower lows.
3) Where's the bottom - When to enter long?
As I have stated, I believe that Monday will open lower, on low confidence early morning (bulls are waiting for safe entry), with a reasonable 0.43% decline to the .61 fib level. From there, RSI levels on the daily may finally have bottom out near the oversold line, and in combination with the .61 support levels, I expect to see our rally for the day. Psychologically speaking, a lot of players will be sitting out during Monday's open, fearing the bottom isn't in. However, as stated: a weaker open to lower lows, and the heavily oversold hourly RSI may signal to buyers that the bears are losing momentum, signaling safe entry for the bulls. That being said, I have prepared two plans of action based on the momentum of Monday's open.
Plan A - If the market opens with a weak drop to lower lows, I will be looking to enter my long positions as the market recovers at the .61 fib extension (extending from December 29th's low, to January 25th's high), at $2749.
Plan B - If the market opens down with strong momentum, I will look to the .78 fib extension level (which coincidentally, coincides with our 50-SMA), at $2715.
4) What if the .61 level doesn't hold?
Our next target is the .78 fib level at $2715, which coincidentally, coincides with our 50-SMA. If it hits this level of support, there is a very strong chance for a reversal to the upside, based on oversold RSI levels and substantial support at the 50-SMA. I will be looking for a long entry if price tests and holds above the 50-SMA. If it cuts through the 50-SMA like butter, I believe we are facing the beginning of much more downside.