Friday due for a bounce

The Hoot 
Actionable ideas for the busy trader delivered daily right up front

• Friday higher, low confidence. 
• ES pivot 1221.0.  Breaking over is bullish.
• Next week bias uncertain, depends entirely on Europe.
• Monthly outlook: bias up on technicals and seasonality.
• ES Fantasy Trader remains long from last week.

 Recap

Well things were looking good for a while there this morning until those pesky Europeans put the kabosh on the market, sigh, once again.  In true tag-team fashion, the Greeks handed off to the Italians who passed it on to Spain this time.  Meanwhile, our markets sink while they play musical leaders.  Where is R. Lee Ermey when you need him?  I want to send him over there to shout "What is your major malfunction?!"

In the meantime, we managed to snatch defeat from the jaws of victory with yet another loss, this time 135 Dow points.  Let's now run down the few remaining technicals that still seem to make any sense at all to come up with a direction for Friday.

The technicals

The Dow: Today's drop left us just under support at 11,780.  It also left the indicators in a considerably more oversold condition than they were the last two rallies we had this month.  This of course does not mean that we can't still go lower, but it would appear we're closer to a bottom than a top right now.  Today's drop also took us very near the lower BB.

The VIX: In a comment on a recent post, Daniel commented on the power of the Bollinger band.  Well today the VIX shot up, hitting a high of 36.46.  Today's upper BB?  36.54.  Once that level was hit, the VIX turned around and finished with just a 3% gain on the day at 34.51.  Once again I will point out that most often when the VIX touches its upper BB, it goes lower the next day.

There's no reason to think this time will be different, particularly since today's candle was an inverted hammer.  Although my call for a lower VIX today last night was a bit premature, the combination of a hanging man followed by an inverted hammer is a much better reversal indicator than either one alone.  We saw this at the end of June 2010 and the next day gapped down.

Market index futures: All three are running in the red tonight at 1:05 AM EST though not hugely, with ES down 0.14%.  However, there are three factors in play tonight that weren't there last night.  First, the RSI has now reached oversold levels and appears to have bottomed.  The last three times we were in a similar position this year, ES rallied hard the next day.  Second, while we broke the 1222 support level today, the next level down at 1212, held  Third, today's low took us to the lower BB and while we're down from the day's close right now, we have moved off the lower BB.  That is also positive.

     And the winner is...

At the risk of sounding like a broken record, I'm going to call for a higher close Friday.  We're now below levels from which previous rallies have happened after big drops.  It just feels like we're due for one.  Note also that Friday is options expiration and that the Dow is up 6 of the last 8 on this day.  In 2008, in the depths of the Great Recession the Dow gained 494 points on this day according to The Stock Traders Almanac.

ES Fantasy Trader

My decision not to let this one go is proving costly in the short run but I'm going to hang in there.  Sometimes you just have to take the heat.  Portfolio stats: the account still remains $173,500 after 35 trades (26 wins, 9 losses) since inception on 8/18 with $100K.