Friday, December 18, 2009

Reversal and Continuation Moves: The Importance of Context

Note that we made day-over-day lows in the ES futures (top chart), reversing overnight strength, only to bounce back into yesterday's range. Several factors suggested that these lows might reverse:

1) At the time of the S&P 500 Index lows, new lows were not posted by either the NASDAQ or Russell Indexes;

2) Other risk assets (gold, oil) were experiencing strength;

3) Weakness was not widespread; for most of the day, advancing issues on the day trailed decliners by less than 500 issues.

It's a nice example of the importance of context in determining whether breakout moves are likely to continue or reverse.