Has a Market Bottom Been Established?

Market action over the past week has been tricky. There has been a fair amount of volatility as we made two new lower lows followed by a third panic sell-off to threaten/test the low on Friday. That last move down was followed by rapid buying to break out above prior resistance and move toward gap fill of the 8/23 close. There has been heavy volume on each sell-off this week and each sell-off was met by responsive buying. The level of responsive buying on Friday was a typical bottoming move. It was a similar move to the one we saw on Wednesday, but even more parabolic, and has since proven to be a great buying opportunity.

Heading into last week the markets had already sold off significantly and many of the mass media outlets were very negative on the markets and predicting further moves down. This made many investors hesitant. However, there were still many of us that saw the significant support levels we had traded into and who were clearly looking to buy the market. I was long most of the week and predicting a move back to the upper 1060s.

It was really quite a brilliantly moving (or manipulated) market. After two moves to the downside weren't sufficient enough to force out the weak longs, the Friday move down forced us (longs) to reconsider. On top of that it was the type of selling that attracted the hesitant bears to jump on the sell-side.

In a little more than one hour, we saw the market sell-off 17 points and then recover and trade even higher than where it began to sell off. Once the buying resumed, there was hardly a down-tick which never gave the shorts an opportunity to get out of their positions or to let the longs get back into theirs. Eventually, many of the shorts had to cover their positions, driving the market even higher.

Look what happened to me (you can follow my trade in the comments here), I managed to actually add to my long close to the low (giving me a full position with average entry at 1046.75), but I sold my entire position at break-even (when we ticked up to 1046.75). I was just trying to be safe at that point. I was still looking to be long, I just thought I could get a better entry lower off a down-tick. The down-tick never came and I was never able to re-establish a long position.

That sell-off and reversal was deliberate, the muscle that has the power to move a market did so brilliantly, robbing as many people as they could along the way. Had I been more prepared, I might have at least left one contract on at 1046.75 instead of covering the entire position in a sort of panic move. It wasn't a bad move, it just wasn't as well thought out as it could have been. Lesson learned... plan and be prepared for every scenario so you don't have to make any split second decisions.

We closed the day on Friday just about filling the gap and just below my minimum target of 1067 on the ES. The 1067 target was reached in the opening minutes in Sunday's GLOBEX session. If you weren't able to get long on the one opportune down-tick on Friday (when the ES sold from 1059.75 to 1054.75), it is difficult to get long now. We have seen a 30 point move up since Friday's lows and it makes for very high risk to try and jump on a momentum trade to the upside now. Its called chasing and it isn't good. There may be times to chase, but I would never recommend it unless you are a very experienced trader with a solid plan behind it.

What I am thinking now?
I will be looking to get long in this market, but I am not sure if we will even see a down-tick that looks inviting enough. What I would love to see is a move back down to 1050, at which point I would look to get long. My strategy in the mean time will be to take scalp trades to the long side off appealing down ticks. Its hard to judge how serious of a bottom was put in last week. I would say that 1075 on the ES will be traded and we could see as high as 1085. The longer term chart outlook is still bearish, but a confirmed move above 1085 will force that outlook to be re-thought.

So looking ahead to this week, I am biased to the long side. how far up we can move from here has yet to be seen, but there is certainly no evidence that suggests that the 1085 resistance is going to hold. However, since I missed the long entry below 1050, it is difficult to justify the risk of taking a swing long now. We'll see how trading progresses this week, but I am certainly long biased at the moment and will be looking for opportunities to buy the down-ticks.