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. After a 400+ point rally in early August (which we were onboard for) ES began its first slow, controlled dip/consolidation over the last couple weeks. There have been many squeezes/dip buys during this window, but most have not stuck.
**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).
We saw this last Tuesday/Wednesday September 1st and 2nd. ES went rapidly elevator down selling from 7714+ down to 7622 low of day last Tuesday and bounced 28 points. Then, early last Wednesday morning ES lost that Tuesday 7622 low of day by 4 points. We then recovered (Failed Breakdown), and ripped. I wrote last Wednesday towards the close: “My general lean is we can continue filling this range to the upside with 7704, 7714, 7733 targets.” This played out well Thursday, and ES broke out and ran to 7760+ Friday.
Then this week, ES dipped again, heading down to 7580’s today. **This leads to an important question. If we know Failed Breakdowns cause rips/dip buys, what causes the sells that precede them like we saw today? As readers know, sells happen when ES loses well-tested, previously defended support shelf. **I wrote in Tuesday’s afternoon newsletter: “Bear case tomorrow: Begins below 7671” We lost 7671 early Wednesday morning and down we went Wednesday and ultimately into today. Why 7671?” This was a big shelf of lows from last Thursday/Friday.
However, sells like this don’t come for free in ES. They always produce rips if and when we get a Failed Breakdown. In this case, it would be on the recovery of 7622/27. These were the lows of day for yesterday which lost during today’s collapse.
Can ES do this tomorrow, snap the red streak and go green Friday? 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.
