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).
We saw this exact dynamic after FOMC Wednesday July 29th. ES went elevator down down to 7324 from 7470’s selling 100+ points in short order. This was a rapid sell that unfolded in an hour or so - exactly what we want to see. In doing so, ES lost the major June 11th low at 7325 by 1 point. We recovered 7325 by 4:35PM that Wednesday, and began a vicious rip Wednesday evening that ultimately lasted into 7830 last week
**After a rally like this, ES needs to digest the move. This usually occurs by price building out a sideways consolidation/bull flag and this is what we spent most of last week doing. **
ES then - at the start of last week - began this process of digesting the move, and building a range which was mostly 7724 to 7800-7794. This was a flag. Last week I was looking for this flag to fill out more, then breakout. **I wrote last Wednesday at 3pm: “**My general lean is we continue to fill it out via the entries discussed above then when its ready we breakout to 7820, 7845, 7879+.” Thursday, we broke this out, and got to 7830’s.
For this week, I was looking for ES to defend the backtest of this flag at 7797-7800. Today, ES tried to backtest this flag at 7800-7794 and failed back into it. This was the first ball drop from bulls in several weeks and caused a cycle of selling.
Can they recover? 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.
