The US Indices Freefall

The chart below shows the current position of the S&P.

What we see is for the past two trading days, December 23 and 24, both range and volume have been above normal. You may ask,

“Ray, the volume of December 24, appears to be well below the moving average of volume. How can you say that it’s above normal?”

I’m comparing the volume of this Christmas Eve to that of previous years. When so compared, we find that this year’s volume is about twice the previous years’ average.

Also, the price action of December 23 and 24 showed accelerating downside momentum. In the chart below, you see:

1. Prices remained below the 4×1 drawn from the secondary high (dashed lines), and
2. They have now returned to below the 4×1 drawn from the December 3 high. The recovery below the latter shows accelerating downside momentum.

That said, all the US indices are extremely oversold and are susceptible to a sudden rally. If such a rally occurs, I expected to be in the range of 8% to 12%.

Given this picture, you could well ask why are closed at my short positions after December 21’s price action.

The chart above shows the trigger: on December 21, a below average range day coupled with above-normal volume. This pattern suggests a rally to come. The context behind the move reinforced the idea.

In the moves down in 2000 and 2007, we saw a bounce of about 8% after a swing down of about 12 to 14%. The swing down to December 21 was 16%. So, for me, the market was oversold, and I saw a possible reversal signal.

Under the circumstances, I could either:

1. exit my position, or
2. place a stop above the high of December 21.

I decided upon (1) because of the uncertainty of the FOMC decision as well as the looming partial US government shutdown.

I have received some emails asking me how do I deal with this situation: where, having exited a profitable position, the market then proceeds to continue without my being on board.

I’ll deal with this question tomorrow.

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