05/01/23
This week was supposed to be all about data – but we kicked it off with the second largest U.S. bank failure ever.
Federal regulators weighed their options this weekend and then sold most of First Republic’s operations to JP Morgan Chase.
According to The Wall Street Journal, The FDIC, who brokered the deal, will share in some the failed bank’s losses.
Hang on folks, this week could be a wild ride.
Let’s check out the big picture for the S&P 500 E-mini (ES1!):
I’ve drawn in two Fibonacci Retracements — one from the all-time high to the low of October 2022 and another from the August 2022 high to that same low.
The first marks the ideal short setup and the second helps validate it.
When a chart retraces more than 78.6% of a move, I assume that the trend is over, and that’s where we are currently when looking at the second retracement.
(Check the lightbulb.)
My target prices to the upside are listed on the right (TP1, TP2, etc.) with the near term targets in green and probable targets in gray.
These are all based on imbalances created during the past year and a half to the downside…
In other words, these are areas where price didn’t receive a balanced offering.
Once these are taken out, I’d look to sit on my hands and wait for the proper short setup near the retracement level mentioned above.
Now, here’s what gives me pause…
On the lower chart from top to bottom, I have the TTM Squeeze, Stochastic Oscillator, and ADX indicators.
The squeeze is important because it tells us when there’s a period of price compression… and compression typically leads to a big move.
It’s the direction that we don’t know. But that’s the beauty of this indicator because if price decompresses, you can look at the histogram to see which way the momentum is flowing.
Green, long. Red, short.
What I’ve highlighted is the extended period of price compression, signaled by the number of dots at the midline… Price is still in a squeeze.
The stochastic, on the other hand, tells us that we’re looking at upside for the time being. This is an indicator commonly used for determining “overbought/oversold” areas.
However, I prefer to use it for finding divergences and overall trend.
The same color concept applies here…
What’s noteworthy about this is that if the oscillator is green for a good while, you can bet that a swift downside move is in the works.
Finally, the ADX (Average Directional Index) alerts me to direction and strength. In my opinion, this is the best indicator for determining the trend…
Just note your time frames as most are set to a lookback of the last 14 bars.
And right now, although the trend is “up”, you can see from the reading that it’s exceptionally weak.
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