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 over the last couple weeks. Last week - as always - bulls tried to buy it.
**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. Then we can breakout to 7797+”. This played out well Thursday, and ES broke out and ran to 7760+ Friday.
Then this week, ES dipped again, heading down to 7630’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 yesterday’s newsletter: “Bear case tomorrow: Begins below 7671” We lost 7671 overnight and down we went today. Why 7671? This was a big shelf of lows from last Thursday/Friday.
**The task for bulls would then be to buy it via a Failed Breakdown. As I tweeted out earlier, the recovery of 7649 would be one such Failed Breakdown. This was a clear shelf of lows set from 6am into 8am this morning. We spent the afternoon basing there, with no recovery yet into the close. **
Ultimately though, all this up and down action is simply rangebound action. Will September bring its usual dose of volatility? 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.
