Monday's stock market action was a nail-biter, as the early strength gave way to midday weakness. Then, out of the blue, stocks stopped falling, trapping late-joining bears near the lows of the day. Members of our live-market Trading Room received early warnings not to join the selling, as the advance/decline ratio, CBOE Volatility Index (VIX) and McClellan Oscillator were well off their extremes from Friday. In fact, the long orders that were placed into Friday's sharp selloff were triggered, positioning those who follow the decision support engine entry/exit protocol in the path to higher index prices between now and Jan. 5, plus or minus three trading days.
Following is the chart of the intraday (478-minute) bars of the E-mini S&P 500 Futures, now updated from last week. It shows the two paths of highest probability as blue arrows, before the bold red arrows take over just after the new year. Only a break of the red line, drawn horizontally from the December low, will change the expectation for a final climb of the wall of worry toward 2145 +/-30. Therefore, we've labeled that line the "line in the sand for bulls."
Notice that Monday's low price was slightly higher than the low a week earlier, on Dec. 14, and that Monday's low had an even lower bullish sentiment extreme. This is a bullish divergence and often attends selling extremes/reversals. Although this doesn't preclude lower prices, the combination of these indicators testifies to a lessening in selling energy, which is the setup for at least a multiday bounce.
Not even a late-day plunge in Chipotle Mexican Grill was able to stop the the Nasdaq 100 from closing 1% higher, as the shorts ran for the exits in most stocks, trying to get ahead of margin calls that are likely going to force even more buying to cover as the 10 a.m. EST grace period ends. That's when margin clerks run out of good will and buy their losing customer's positions into compliance.
The rest of this week should find the VIX stair-stepping its way toward the 15 zone, if not even lower, as stocks likely rise along the blue arrow paths. With this in mind, we ask the decision support engine question, "If I had no money in the market at this moment, would buying or selling actions be objectively indicated at this moment in time?" Based upon the current conditions, and only looking out until Jan. 5, plus or minus three trading days, the answer is buying actions only, as long the Dec. 14 lows remain intact.
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This article is commentary by an independent contributor. At the time of publication, the author held shares of ProShares UltraPro QQQ ETF (TQQQ).