Bounce Zone 1/4: $ES1! at key support levels
Over the past week, I posted a few make-it-or-break-it key inflection levels to watch as I felt we were at a key inflection point in the market. With the benefit of hindsight, it is clear by now the trend is negative as $CL1! broke below the $50 handle as did $US10Y which broke below key levels set in 2012 and 2016.
After what some have termed as a negative 5 sigma event and the VIX hitting a high of 50, we should be expecting some mean reversion on the VIX as it is a mean reverting animal at the extremes. Since the VIX is a derivative of the SPX volatility, by extension, equity markets are mean reverting at the extremes.
Last night, Friday 28 Feb'20, the $ES1! entered into the bounce zone as did other key equity indices. For $ES1!, the bounce zone is combination of factors:-
--> since 2018, the 2800 to 2900 region has been a key resistance and support levels as evidenced by the number of peaks and troughs over the last 2-ish years. This is confirmed by the clustering of SSR; SSR are volume-based support and resistance levels and a good indication of buying/selling activity.
--> Last night price action formed a classic Japanese candlestick hammer pattern. Hammers are reversal patterns.
--> This past week price action was simply a mean reversion to the long-term weekly mean. Despite CNBC telling us equities are in a correction, it is not. Gravity did its work and reverted the $ES1! to its long-term mean PERIOD. For a real correction, we would need to break down from the long-term mean which brings us to the last point...
--> Tops are complex and bottoms are messy but it is never a straight line up or down. As I mentioned in one of my previous post, if you had gotten your asset allocation right, you would be sleeping sound. If not, take a deep breath, don't panic, wait for the bounce and sell into strength.
After what some have termed as a negative 5 sigma event and the VIX hitting a high of 50, we should be expecting some mean reversion on the VIX as it is a mean reverting animal at the extremes. Since the VIX is a derivative of the SPX volatility, by extension, equity markets are mean reverting at the extremes.
Last night, Friday 28 Feb'20, the $ES1! entered into the bounce zone as did other key equity indices. For $ES1!, the bounce zone is combination of factors:-
--> since 2018, the 2800 to 2900 region has been a key resistance and support levels as evidenced by the number of peaks and troughs over the last 2-ish years. This is confirmed by the clustering of SSR; SSR are volume-based support and resistance levels and a good indication of buying/selling activity.
--> Last night price action formed a classic Japanese candlestick hammer pattern. Hammers are reversal patterns.
--> This past week price action was simply a mean reversion to the long-term weekly mean. Despite CNBC telling us equities are in a correction, it is not. Gravity did its work and reverted the $ES1! to its long-term mean PERIOD. For a real correction, we would need to break down from the long-term mean which brings us to the last point...
--> Tops are complex and bottoms are messy but it is never a straight line up or down. As I mentioned in one of my previous post, if you had gotten your asset allocation right, you would be sleeping sound. If not, take a deep breath, don't panic, wait for the bounce and sell into strength.
