An Oversold Bounce

The cash S&P500 rallied yesterday to make an uptrending price bar on the daily chart. Not only has this bounce alleviated the severely oversold condition we’ve had over the past few sessions, but it has displayed two other “bullish” aspects:

1) A technical “buy” signal was generated as bullish divergence formed between the RSI (top pane) and Composite indicators (middle pane);
2) The active “Resistance” line (see chart) was validly broken.

In the past that “buy” signal would have swayed me to bullish action – even though the weekly chart is still on a “sell” signal. Of late I have become more reactive to market action and less “proactive”. This includes considering the Tom DeMark idea of not moving into a severely oversold market. That constraint has had the practical effect of passing up yesterday’s bullishness and to not take any action regardless of today’s price action.

So what am I waiting for? The “next” opportunity, and this is not necessarily on the long side. It will be what the price action gives me. The next steps in this process are to see which price fractals and support/resistance lines form next. If Monday’s low of 1240.68 can hold through today then that price bar’s low will be a price fractal (lower than the lows of the two price bars immediately before and after it). This occurrence would establish a new support line below the market and delineate where a shorting opportunity may lie. For a long trade I will wait for the market to close back below the active resistance line or for that line to adjust to a new supply/demand equilibrium should a new high fractal form.

Finally, a quick note on the Directional Movement System that has been mentioned over the past few postings: the ADX has still not turned down.