At The Bottom, but...

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In yesterday's live O.R. Mastery coaching session we talked about when to break the rules. Today is another time when breaking the rules of the daily set-ups and focusing on key reference points from daily charts could be in order. But before I discuss breaking the rules, let's look quickly at what the rules would outline as our trading conditions today in the market watch:

Market Phase: Bearish in all 4 (Q's back under 50, will confirm back to bearish phase if closes under today)

Intermediate-term Daily: Bearish in 3 of 4. The 10 and 20-day daily MA's are stacked and sloped down with price below both in all but the Q's which are stacked, mixed slope and price below. I'd call the Q's neutral in so much that they could go either way by this measure. 

Floor Trader Pivots: All 4 bearishly stacked

3-day Pivots: Confirmed bearish bias in 4 of the 4.

Daily Trend Lines and Swings: 3 of the 4 bearish but all at key support.

Add it all up...
The markets' bearish phase has reasserted itself and has not demonstrated that that they are ready to stop going down on a daily basis. A late day rally of a fraction of the day's range doesn't call a bottom for me.

Give the market trends we should not focus on the long side. Short OR Reversals and breakdowns should be in order. But the3 of the 4 markets have had a pretty extreme move in the last 2 days to the bottom of a multi-month range and now sit right on key support on the daily charts. The combination of important support AND a major divergence condition in the Q's on a daily basis makes pushing on the short side more difficult that the trend measures above might suggest.

A very important determinant of how hard to push on shorts today will be whether or not ALL the market watch are trading below their low of yesterday. In that condition this market is extremely vulnerable to yet another big day down.  Absent that condition it is susceptible to a short covering rally.

I have frequently covered how to trade divergences like this in our Mastery training videos and prior Focus List posts . For this post I can't be as thorough as I'd like so I'll summarize with an interesting chart of the Q's. Note the following:

• The channel bottom it sits on is based on the parallel from the swing highs
• It broke the trend line from the lows, but would it not take much to recover it, and that would be bullish
• It has not broken its recent swing lows from 9/6
• The low of yesterday held the 62% Fib level (shown as white) and on a closing basis it is close to holding a 50% retrace level (shown as magenta).

All this is a healthy price action. The question is whether the bearish phase will overcome it. An easy way to play this is to focus on the zone from yesterday's low (52.75) down to the 9/12 low (52.57) as the support zone that must hold to trade the Q's as a retracing long. But this breaks our basic rules AND it is making the assumption that the Q's will recover the trend line in the next day or so.

However, even if you don't literally trade the Q's, you can use that "trade" as you basis for whether or not the Q's are holding a strong divergence condition.

Don't count on the Q's to rescue a daily breakdown in the other 3 indexes, but use it as measure of the potential for the August lows to hold.