First Real Dip For SPX In Over A Month. Where Does It Land? August 21 Plan

As readers know, the theme for the past several months has been buy dips. The dips vary in size, speed, duration, structure, but they all resolve the same: They get bought. This is despite the fact after every dip, we get the standard “world is ending” calls. We saw this Wednesday July 29th after FOMC and it started this macro leg up. This was a particularly large dip (over 100 points in a little over an hour), and as a result it would mean the dip buy would be particularly large. It was and we’ve ripped 400+ points since then. We were on board for the entire thing.

How do bulls buy dips in ES? As I frequently discuss all major rallies in ES start on Failed Breakdowns, because Failed Breakdowns are how institutions accumulate. Institutions accumulate when ES flushes hard and goes elevator down - losing, and then recovering a big previously set low. In doing so institutions are able to trap shorts that are chasing, use them as liquidity, then price rips the other way when the low recovers. Usually, this process correlated with an external headline shock as institutions love to use headlines for liquidity to trap shorts (or in rare cases, they/insiders are aware of headlines in advance).

After this monster rally though, ES has now begun its first retrace of this selloff. Why did we selloff? As readers know, ES sells off in one circumstance only. When a well-tested, previously defended support shelf fails. Last Thursday/Friday, ES built a support shelf at 7797 and we lost it Monday, down we went. This puts bears in control until the shelf recovers.

This does not mean we won’t see rips though via Failed Breakdowns.

We saw this dynamic yesterday. I wrote Tuesday at 4pm: “First support down is 7716. We set a nice shelf of lows there today. At 4am, we set a low there and bounced 20 points. At 11am, we also set a low around there and bounced again. The Failed Breakdown of this shelf is actionable.”

We got this at 835AM yesterday. ES lost 7716 down to ~7700, recovered 7716, and ripped to 7760’s yesterday. However, after a big breakdown like we saw of the 7797 shelf, the task for bulls is ultimately to backtest and recover that shelf in order to regain control. They were unable to do so and until that happens the tendency is to sell bounces. Today, we sold more.

Will bulls pick this one up? In today’s newsletter I’ll expand on this, I’ll go over today’s Failed Breakdowns (these are key to know), and I’ll discuss the actionable plan for tomorrow.