I promised to briefly chime in tonight with some bounce targets, so let’s get to it:
Momentum in a downtrending market does actually resemble a ball bouncing down a sloping surface in that it doesn’t move linearly – rather it drops and then at some point bounces off of certain support levels. The vehemence of the resulting retracement is directly related to its speed (i.e. how fast it dropped) and the type of surface it bounces from (i.e. the ‘softness’ in the amount of dip buyers stepping in). From there it propagates upward until it either runs out of energy or hits some type of resistance.
If you would draw a Fibonacci retracement on the image above (I was too lazy to do it but if you have time to burn please try) you’ll see that those bounces fall very close within common fib lines. Of course it’s a bit of an art as well as a science but in the past I have seen fib levels being observed over and over again.
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Not really too much magic involved – if you are a long term reader here you may remember how I stacked those fibs in the past. No worries – I’m not about to start counting waves again – but in the past I did use a loose approach to wave theory rather successfully when projecting possible target areas.
So what we have here already is a push above the 23.6% mark – the fact that it happened within the same day we painted a low gives us decent odds to expect the 38.2% mark to be touched. Which would be the minimum after the oversold readings of the past few days. Depending on velocity, breadth, volume, etc. we’ll then assess whether we should go short there or wait for a bounce to 1230. That would be my preferred setup as it’s also more easily defendable. If we push toward 1250 I would get worried about the bulls taking over the steering wheel and that the current intermediate leg down had completed.
Of course nothing prevents the tape from dropping like a rock again tomorrow – there are no guarantees and we have to roll with the punches. I personally would not chase the tape if i see degradation tomorrow – but in the end it’s your call. The final target areas for the completion of this push down I presented remain unchanged at this point.
See you on the other side.