Schrodinger’s Market.

The bouncing cat is either dead or alive at S&P 2,800 and we won’t really know which is which until the weekend as the S&P failed to hold it yesterday and our 5% Rule™ demands 2 full days over the strong bounce line (2,800) before we can put our rally caps back on.  Strong bounces are NORMAL – it’s what we expect on the way down as each 5% move lower is followed by a 1% (weak) or 2% (strong) bounce in a healthy correction.  The downtrend isn’t broken until the strong bounce line is held – a very simple way to tell whether or not it’s a good time to jump back in.

Of course, Schrodinger contended that the market was neither dead nor alive until you observed it but the act of observing it causes the outcome to change – that’s very true in a bot-traded market where an act of programming made 6-18 months ago determines the movement of the market today as thresholds are crossed on various trading programs which, upon observation of the action, then cause the market to be more alive or more dead as they too kick in and start trading.  

That’s why we have the 2-day rule, you have to let the various cross-currents play out before you can say you are really recovering.  Take the Shanghai Composite, for example.  China’s market looked like it was bouncing in 2015 but went lower and then made another protracted bounce that collapsed early this year and now it turns out we’ve been consolidating for a move lower for 3 years. 

I know – who cares about China?  What happens there doesn’t affect us, right?  That’s the same thing I heard back in 2006 when I told people that we should be very concerned about a slowdown in China.  It took a while, but it did matter in the end…    

Does Europe matter?  Last Wednesday, we were right on top of shorting the market BECAUSE Germany’s DAX Index was going to fail the 11,800 line and I pointed out that, in 2015, the DAX had a 20% correction after failing that mark.  Traders may not remember these things but TradeBots never forget! …