Likely 5 percent correction to Dow 20000 erasing 2017 gains
Pre-Open market analysis
Tuesday was a big bear trend day, but yesterday was a trading range day. It was therefore a bad follow-through day for the bears. Yet, the bear breakout was big. In addition, it closed well below the lows of the prior 20 bars on the daily chart. Furthermore, the Emini reversed down from a measured move target on the monthly chart. Finally, the high on the weekly chart was exceptionally far above the moving average. As a result, this is good context for a pullback to the December close. Hence, there is a 50% chance that Tuesday’s bear breakout was the start of the correction. This is true even if there is a rally over the next week or two.
Unless the bulls break to a new high, the odds favor lower prices. In addition, there is a 60% chance of a test of the target within a couple months. Furthermore, there is a 70% chance of the correction at some point this year.
Selloff was in part cause by options sellers who were hedging
Since Tuesday was a series of big sell climaxes, only about half of the selling was caused by traders being bearish. The other half was created by option selling institutions.
When the market falls quickly, puts quickly become profitable. These options sellers are therefore holding losing positions and the losses are accelerating. They therefore have to short the stock market to hedge their positions. They are not bears, but they are selling huge volume, and that adds to the sell climax. Hence, the day falls much further than it would if the bears alone were responsible.
Overnight Emini Globex trading
The Emini is up 4 points in the Globex session. Since yesterday was a bad follow-through day for the bears, the bulls see yesterday as a High 2 buy signal bar. Hence they believe that the 2 legs down from the all-time high is simply a bull flag.
Because the context is good for the bears and Tuesday was an exceptional bear day, the odds are that the 5% correction has begun. Since yesterday was a good bar on the daily chart for the bulls, the odds are that the Emini will rally for 1 to 10 days before the bear swing resumes down to the December close. The bulls need to break strongly above Tuesday’s high to take control of the stock market again.