Gio's Gameplan: Bear Market Bounce

By: Gianfranco Carrion

Are the “markets still in turmoil”? Yes. The $SPX remains in a downtrend until proven otherwise. However, two factors generated the much expected bounce in equites. First, as discussed last week, breadth ($NAA50R) reached historically oversold readings. Second, and most important, Crude Oil bounced, which nowadays means a world-wide market rebound. Simple story. Going forward, look for follow thru in the commodity bounce and/or a decoupling of equities and crude oil (ex. $SPX goes higher regardless of Oil).

$USO – Daily

• Always chart $WTIC weekly for most accuracy. However, I like charting $USO daily as it shows gaps
• Jan 20: $USO gaps down -1.8% and goes as low as -6.7% before printing a hammer doji (-2.9%). This was the first sign of a possible upside reversal
• Jan 21: $USO gaps down again -1.7%; however, it reverses to close green +3.8%. Second BIG sign of reversal
• Jan 22: Crude oil closes +17% off the low

If you were focused on headlines on January 20th, you would have been distracted away from the hammer doji. Instead, you would have been focused on the fact that oil “crashed”, the “supply glut” and an “oversupplied market.” All of the latter are true; however, they have been true for 1.5yrs. On January 20th, all that mattered was the price reversal that displayed the possibility of higher prices (hammer doji)

$NAA50R – Daily

• Second flag that called for a market bounce was breadth readings that reached historic lows
• Jan 20: Only 8.6% of Nasdaq stocks are over their 50dmas (14.8% over 200dma). Historically oversold

$SPX – Daily

• Jan 20-22: $SPX bounces +5% from the low (1812) to closer over 5ema (1889)
• 5ema now becomes our rising stop. If long $SPY or other stocks, this is your line in the sand
• Resistance is at 20dma (1966, +3%) or previous consolidation area from Sep 2014 at 1990 (+4.4%)

$SPX – Weekly

• Weekly candle also printed a hammer doji on the lower bolli. Long hammers often mark price reversals to the upside
• As long as we remain above 5ema I expect a bounce to 1990. A falling 10wma (2010) could stop reversal if we retest it  

$SPX – Monthly

• It is unsurprising to see the $SPX January bar return inside the monthly Bollinger channel
• Anyone pressing shorts under lower bolli (1891) was asking to get squeezed. Level now very important
• Note how 2007 tested the lower bolli and bounced a few times before the major breakdown
• Continue to use daily & weekly charts to navigate shorter trends but do not forget the monthly $SPX chart remains in a downtrend. First sign of reversal to the upside is a monthly close over the 10 month moving avg.

Lately the faith of this bull market is pegged to the Crude Oil $WTIC chart. Last week (1/18) we saw a nice bounce in both; however, the trend remains downward for both as well. My confidence on the overall trend and structure of $SPX will increase when $WTIC manages a close above its 10wma ($36.56)

$WTIC – Weekly

• +17% off the lows in 3 sessions
• Could easily run to falling 10wma (36.56) or a further +13% before encountering heavy resistance
• Previous bottom attempts rallies = Jan 2015 (+22%), Mar 2015 (+47%), Sep 2015 (+35%)

FINAL THOUGHT

As Oil goes, the market goes. Simple. Previous behavior suggest that for this bounce to continue we must see follow thru in the $WTIC bounce. The $SPX closed above its 5ema (1890) which points to a possible trend change to the upside. If long, use the 5ema as a rising stop. Simple.

The $SPX weekly chart points to a possible bounce to 1990 (+4.4%). However, the market remains in a downtrend on a monthly timeframe. A bearish cross of the 10/20 month is virtually a reality, which marks a change in direction. Any bounce should be treated as a trade rather than a long term entry. Below I’ve posted a few induvial charts I am tracking for trades within this possible bounce. Lastly, amid a bearish outlook, Howard Lindzon, co-founder of Stocktwits, captured one possible bullish scenario I’ve had in mind since late 2015. Always remain open to both sides of a trade. Thank you for reading – Gio

$SPY – Possible bullish scenario

$AAPL @ 101.4 / Stop $98.5 (-2.9%)

Breakout from downtrend. Dips look buyable. Once over 20dma it’s a +8% trip to a 50dma retest

$XLE @ 55.74 / Stop $54.1 (-2.9%)

Breakout from downtrend. Dips look buyable. If Oil reverses strongly Energy could easily test 50dma at 61.5 (+10%)

$AMZN @ 596.4 / Stop $584 (-2.1%)

Breakout from downtrend. Dips look buyable. Play on $QQQ bounce with a target of +4.7% at 20dma retest

$NFLX @ AVOID

$QQQ bounce doesn’t = $NFLX bounce. Reported ER and reverse same day just to lose all gains. No need to own