Just when traders were unhappy with the S&P 500 futures’ quiet range and low volume, which made it seem like this market would grind higher forever, we wake up this morning seeing a 20-handle drop overnight, the biggest daily decline in over two months.
We must remember that there was a time when a 20-handle decline was not a huge deal. This market is still in a bullish trend, and any selling momentum has not followed through in 2017.
However, given the overnight price action, we must at least consider the two sides of the trade with two hours to go until the regular session open at 9:30 a.m. EST.
First, for the bullish dip buying view: after a steep drop, this market found support at the green zone on the chart below. We identified this zone earlier this week, which is 20 handles from the current all-time high. This is a good risk-to-reward zone for dip buyers, and it looks like they took advantage of it this morning.
However, bulls now need a higher low or a double bottom in this area on the re-test. In the worst case scenario, the bulls could look to hold the 2539.50 price at the red line on the chart, which is the 50% retracement of this month’s range.
Bulls would then need to take out the 2551.50 area marked by the blue line, which is the 50% mark of the overnight move. If bulls can find momentum and support above that area, they will probably hit new all-time highs over the next few trading days.
From the bearish side, if sellers are going to have their way on this 30th anniversary of the 1987 Black Monday crash, they must defend 2551.50 (the blue line) before the 9:30 open, and then take out the green zone in the first hour today, and then the 2539.50 level at the red line in the first two hours of today’s session.
If bears do this, then our next lower target would be 2533.25 (marked in orange), which is a 50% extension of the overnight range, and which would roughly be a 30-handle pullback from yesterday’s high. However, this type of move has been virtually non-existent in a single session over the course of this year.
While we don’t want to get too excited, we should note that we do not have very strong support levels on the way back down to 2500, and we will also be watching the 2518 area at which this month opened.