A Short-Term Bounce In The Cards

The minutes of FOMC’s April Meeting were released on Wed, May 18th, 2016 and they rattled the market. On Friday, May 13, 2016 the S&P 500 futures made a low 2038.50, just above the May 6th low of 2030.50. Between May 6th and May 13th, the futures had rallied to 2079.75 on May 10th, just above the May 2nd high of 2077.50. The action of these four days formed a nice looking horizontal channel, which itself is being formed within a downward sloping flag from the April 20th high of 2105.25.

Between May 16th afternoon and May 17th NYSE session open, futures made another horizontal channel near the upper limit of the bigger channel mentioned above (see the top channel in the chart). Then on Tuesday May 17th NYSE open, the price broke this channel and travelled 2X of its height to form the low for the day. That’s where it languished for the Asian and early European session.

S&P Futures 30-MinutesBy the time the NYSE open came around, the price had made a nice symmetrical triangle – bounded by the black lines in the chart – near the bottom of the horizontal channel being formed on the higher time-frame (only the lower bound is shown in the 30-minute chart).

The symmetrical triangle can break either ways, but since this one was near the bottom of a horizontal channel, whose the lower bound had been respected for a while chances of it turning out a reversal were high. Sure enough, the NYSE open pushed the price above this triangle. The S&P sailed above most of the morning to reach the lower limit of the horizontal channel that it broke a day earlier just before the release of FOME minutes.

The minutes made the market drop like a rock and S&P futures soon breached the May lows but finished near the day’s open. In the process, the S&P formed spinning doji for the day indicating a day of indecision. The Asian and early European price action did not clarify the situation and the NYSE open rolled around with futures hugging the support line (see Chart 1, which is up-to 7:00 AM on May 19th).

The discussion around FOMC minutes had a bearish tone. However, the day’s price action does not look so bearish. Below are the daily charts of major US indices.

S&P 500 Index

S&P 500

Dow Jones

Dow Jones



Dow Transport

Dow Transport

After forming a spinning doji of May 18th following FOMC minutes indicating indecision, S&P 500 formed a Hammer on May 19th, which is bullish. Since making a high on April 19th rising from the lows of February 11th, S&P has formed a down-sloping flag, This chart pattern usually turns out to be bullish. The retracement from high is nearing one-third of the total rally. The hammer is formed near the lower bound of the down-sloping flag, which is also near March lows. The probability of price to test the upper bound of the flag are higher. That would ne in 2065-2070 range. The corresponding range for emini futures would be 2060-2065. For that probability to come to life, the index has to rise above the highs of May 19th and close strong.

Dow Jones Industrial Averages is also making a down-sloping flag. Unlike S&P’s hammer, it did not make a bullish formation. Still the May 18th’s action was not bearish and it too is near a support. If Dow rises above May 18th’s high and closes stronger than the probability of it reaching the upper bound of the flag increase. That resistance would be near 17800.

NASDAQ Composite formed a spinning doji on May 18th, which indicates indecision. It also briefly breached the low made on May 6th. If the index rises above May 18th high and closes there then it would have completed a Wyckoff Spring pattern, which is bullish in nature. NASDAQ is also forming a down-sloping flag, though its April 19th high did not go as far as S&P 500 and Dow. It has also retraced 38.2% (a Fibonacci level) of the rally from February 11th. The next resistance is near the upper bound of the flag near 4780. If NASDAQ closes above 4812 then it would have formed a double-bottom pattern with a potential target of 4950.

The joker in this card is Dow Transport. Transport made a high of 8114 on March 21st and then it made a low of 7623 on April 7th. Then it too made a high along with other major indices on April 19th, which took it to the highs made on March 21st. In the process it formed a horizontal channel. It tried to break the lower bound of this channel on May 13th before doing it on May 13th. However, since this it has travelled back up into the channel. Transport’s last four days’ of price action is not very decisive. During this time it is forming an upward-sloping flag. This is usually a bearish pattern. For this to turn bearish, the index has to close below 7524, May 19th’s low. If Transport breaks below this level then it may nullify the emerging short term bullish patterns on other indices. If on the other hand, Transport closes above 7636 on May 20th then that will increase the success probability of bullish patterns of other indices. If that happens then Transport themselves might catch the tailwind and try to reach the next resistance level near 7753.

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