Thursday's Trading Plan: Day Two of the Bounce

08/28/2015 7:00 am EST

Focus: STOCKS

Ryan Mallory

Contributor, Share Planner


Ryan Mallory, of SharePlanner.com, offers his technical outlook for the S&P 500 on Thursday—day two of the market bounce—including his take on how long these dead cat bounces can typically last and why he thinks ultimately it may prove to be an opportunity to short.


Technical Outlook:

  • One of the largest bounces the market has ever seen unfolded Wednesday, sending SPX back above 1900 to 1940.
  • These dead cat bounces can easily last two-to-three days before the selling resumes.
  • Here is what you should be asking yourself—in six days, SPX drops 234 points non-stop—over 10%. Are we really to assume the sell-off is now over in just six days and we are all going to be back on the road to new all-time highs? I think not.
  • SPX looking to break above the 5-day moving average Thursday at the open.
  • Volume on SPY remains extremely elevated, but has faded over the previous two trading sessions.
  • Volatility continues to drop, but remains quite elevated at 30.32. It dropped Wednesday 15.8%, which considering the amount of Wednesday's rally, would have seen a bigger drop.
  • T2108 (% of stocks trading above the 40-day moving average) saw a 59% increase to 9.7%, not unusual to see such large rallies when the indicator is at such a low reading.
  • Potential base forming on SPX 30-minute chart; a move over 1954 would be considered significant and could lead to the market rallying further from here. At the moment, SPX is poised to open above this level.
  • Still the objective for the bears will be to 1) resume the downtrend and stop the dead cat bounce 2) Break below the October 2014 lows of 1820.
  • Trade nimble, be careful about holding positions overnight, because the volatility is still at extreme levels and much of the daily moves are happening before the market ever opens.
  • The current market conditions makes it very difficult to swing trade positions overnight simply because the risk cannot be contained with the trade parameters. That doesn't mean that I won't consider holding a position overnight, but it has to be aligning well technically.
  • It stands to reason at this point that the Fed will not raise rates in September, possibly not even this year.

My Trades:

  • Bought SDS Wednesday at $54.29 and sold it at $54.73 for a 0.8% gain.
  • Did not add any new swing positions Wednesday.
  • Did not close out any swing positions Wednesday.
  • 100% cash
  • We have a bounce that is underway with Wednesday's rally. Ultimately I think it will prove to be an opportunity to short.

Chart for SPX:

chart
Click to Enlarge

By Ryan Mallory, Founder, SharePlanner.com

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