What the ??!!!

Buy the dip? Or sell new lows?

In late September I was looking for a move up in the US stock indices. I see seasonal strength from early October to mid-January.

But, I did not see the price action to confirm that Seasonal strength. Indeed, as we entered October, the price action suggested a distribution rather than an accumulation pattern.

We saw in all four indices, after making new highs, the upward move stall. So, the questions I asked myself was:

If I want to short an index, which would it be?

I decided it would either be the S&P or the Dow: both could generate an    18-d change in trend Upthrust – a most reliable pattern. For the S&P, the short would be triggered on a bearish-conviction close below 2830; for the Dow, I needed to see the appropriate close below 26309.

Yesterday, both shorts were triggered.

The target for both moves is at least their respective Primary Buy Zones:

• For the S&P, 2576 to 2532
• For the Dow, 23936 to 23320

But the Upthrust suggests an 18-day change in trend, suggesting we’ll see a breach of the 18-d lows and a sustained downtrend to follow. If that happens, what sort of move can we expect?

To answer that question, I need to consider the VIX.

If we are to see a change in trend, we should see the VIX move up. If the VIX moves up above 35, then we can expect to see a move of at least 14%. To see why I say this: first, consider the chart below showing the dates when the ViX moved above 35. I have noted the corresponding dates on the S&P

Now consider the chart below: it shows the magnitude of the S&P decrease after the VIX hit 35 or above. We see two ranges:

• 27% to 49% and
• 12% to 16% (mean around 14%).

A 14% move would give us a target of 2529, basis cash.

The question now is: how to enter?

Yesterday, both (S&P and Dow) ranges were at least three times greater than normal. So, if I just shorted at yesterday’s close, the risk would be unacceptable.  Of course, I could wait for a retracement.

But then, another issue arises: a retracement is unlikely. Why? Because when the Vix closes above 20, I’d expect to see downside continuation of around the same magnitude as yesterday’s. The VIX closed at 22. So we are unlikely to see a retracement tonight.

Thus again the question: how to enter?

I’ll be using a modified form of the 4-index System currently in Beta. In effect, it’s an Initial Balance System with filters. The filters improve the positive expectancy.

Tonight, I’ll be looking for an initial balance greater than normal. I’d prefer to see 50% of an open-gap (of at least 10 points) unfilled by 10:30 EST. Is the open-gap essential? Just nice to have. The strong Initial Balance is a must.

The entry would be the breach of the Initial Balance low. My initial stop would be above the Initial Balance High. The Rule of 3 would be in play. My core profit target the Primary Buy Zone.

Let’s see what happens.