**NOTE: This is a resend of the newsletter for Monday October 19th, originally sent on Friday at 4pm, for those who did not receive. **
As readers know, the theme for the past several months has been simple: buy the dips. The dips vary in size, speed, duration, and structure, but they all resolve the same way: they get bought. Wednesday, ES was tested with its next large dip, and it was a 100+ pointer. Bulls bought it. Today, ES was tested with another.
How do bulls buy dips in ES? As I frequently discuss, nearly all major rallies in ES begin with Failed Breakdowns because Failed Breakdowns are how institutions accumulate. Institutions tend to accumulate when ES flushes hard and goes elevator down—losing, then recovering, a major previously established low. In doing so, institutions are able to trap shorts that are chasing the move, use them as liquidity, and then drive price sharply in the opposite direction once the low is recovered. This process is often correlated with an external headline shock, as institutions love to use headlines for liquidity to trap shorts. In rarer cases, they—or insiders—may be aware of those headlines in advance.
If that is how bulls buy dips though, what causes the sells that precede them? **A major sell in ES occurs when ES loses a major shelf of previously tested, well defended lows. **We saw this Wednesday and its what started ES lower. I wrote in Tuesday’s newsletter: “Bear case tomorrow: We likely dip below 7838.” This 7835-38 region was the Monday/Tuesday low of day, we lost it, and sold hard to 7718 Thursday morning.
After a dip like this, ES would need to put in a Failed Breakdown to rally, but in order for bulls to regain control, the 7835 shelf (the failure of which caused the sell) must recover to bottom. A relief rally leg though would begin on the Failed Breakdown/recovery of the the major October 5th low at 7760. I wrote in Wednesday’s newsletter: “Recoveries of 7760 are one spot to look.” This was a big shelf of lows from October 5th. We recovered 7760 Thursday, and ripped to 7805+ today.
We did not recover 7835 though to give bulls back control, and went elevator down again today to 7680’s. Bulls will need another Failed Breakdown to try again back towards 7835. Will they try Monday?
In today’s newsletter, I’ll expand on this, review today’s Failed Breakdowns—which are key to understand—and discuss the actionable plan for tomorrow.
