After large declines markets bounce. That is what they do. Understanding how to spot price action that is indicative of an increased probability of a larger sustained bounce is important. In this video, we take a look at just that.
View Video Transcriptwhen the market is dropping and dropping
more and just getting obliterated
sometimes it seems like they’ll never be
a balance but the reality is when more I
could sell off quickly and precipitously
there are always is a balance that’s
what markets do if you want to learn how
to spot the signs of a coming bounce and
play that bounce stick around
[Music]
hi I’m Steven Spencer I’m a partner at
SMB Capital a proprietary trading firm
in New York City where we trade stocks
options and futures so in today’s video
we are going to talk about market
bounces that follow after large market
declines understanding how to spot the
signs that are indicative of an
increased probability of a larger
sustained bounce is important after a
huge market down move being positioned
for a large balance is tricky but the
risk to reward can easily be greater
than 10 to 1 if you’re selective on your
entries and understand the potential
upside for the market let’s look at
recent price action in the S&P 500 via
this pie chart and kind of talk about
the signs that we’re seeing right now
and what I’m looking for going forward
to play a larger market bounce so the
first chart that we’re going to take a
look at is the spy daily chart and what
you can see right now after today’s
market close it’s in a very steady
downtrend but let’s take note of a
couple of things the first thing is if
we go back to the end of February the
market was down around 286 spies we’re
at 286 there’s a few green days there 3
out of 4 days and this basically means
that the close is higher than the market
open that means during the day buyers
were in control the market opened at a
certain price it closed at I our price
so markets controlled the price action
for that day so we saw the more I can’t
think the balance there and then move
sideways for a few days buyers
accumulating at 300 or so just above 300
and then we had a series of gap 3 gaps
lower in the next 5 trading days but
even as we look at that downtrend what
you can see is for those days the market
closed higher than it opened so as we’ve
been moving lower 3 market hours buyers
were attempting to move prices higher
and they did on several occasions but
these lured gaff downs have brought us
down to
two-forty area now why is the 240 area
important it’s an area where we sold off
to in late 2018 we went we blew through
it we bounced back above it and then we
had a huge market balance in late 2018
and early 2019 so this was an area that
people had their eye on as soon as we
started selling off above 300 it also
coincides with a very quick 20% down
move from where the end of February in
the beginning of March where some people
had been accumulating so this
accumulating stock so this is a very
strong down move from recent prices 20%
and a natural support area on a higher
time frame moving out a couple of years
so that’s why we’re focused here but at
the same time I understand the
circumstances of how we got down to this
level the catalyst for what’s causing
the market to sell off a global pandemic
is not really something that the markets
seen before and I’m very mindful that
this is not the same as some of the sell
offs we saw from 2014 to 2016 if I had
to you know there were different reasons
I don’t remember even exactly what each
reason was for those sell offs but each
time we came off really hard into the
support areas from the prior a couple of
years I felt pretty confident that we
would bounce from those levels in that
case was the Spy 182 we can actually
even take a look so you can see going
back to 2014 to 2016 in 2014 we sold off
from above 200 down to 182 and we
bounced back up in 2015 and there was
some sideways consolidation and the
market got hammered very violently from
about 210 to 180 in a series of two or
three trading days but again people were
very fearful there but what happened was
there was a great distance in time and
what gave me great confidence to buy
into the low 180s in that situation is
when time goes by and at this point it
was almost two years and you come back
down to a price the market essentially
is cheaper and when the market is
cheaper large fund managers are saying
wow I can buy stocks now appraised
that I was buying 20 months ago and
fundamentally that things aren’t that
bad I think oil it sold off at that
point but for the most part outside of
the energy industry things were going
really well and that led to a very quick
bounce we did revisit those levels again
in January in February of 2016 but I
felt even better on those two revisits
of buying because again stocks were even
cheaper because the economy was doing
well I don’t particularly remember what
the catalyst were we sold off at it
earnings were good catalysts were good
and you know we were now 18 months I
guess 18 months later from where we had
bottomed in 2014 and so you’re feeling
really good there was no global pandemic
leading to a deep recession again again
a key economic activity in the United
States is basically sharply decelerated
I’m not sure what the you know really
example is when this happened maybe the
last time we had the the flu in the
early 20th century
maybe economic activity stopped then but
for the modern for the last let’s say 50
years this is really unprecedented
what’s going on and so a mindful of the
bigger picture backdrop but at the same
time when markets do sell-off on an
accelerated basis and stocks start to
look cheaper to people and when there’s
a lot of fear those are ingredients for
bounces and so we did see over the last
couple of days you very well could say
as we were coming down to this 240 area
would not hold and if we zoom in what
you can see is over the last few trading
days we sold off on Thursday pretty hard
to around to 46 to 47 the overnight
futures low I believe was below to 40
overnight on that Thursday the next
morning we gapped up quite a bit we
gapped up to above 250 and he ended up
rallying at the end of the day very
strongly but that was a Friday and we
know that the last almost every weekend
this year in 2020 we have been selling
off into the weekend people have been
concerned and the news flow over the
weekend everyone at home glued to their
televisions or glues glued to YouTube I
guess
was the thing as the news is flowing it
was very negative and you know we have
not seen the markets asthenia and up
move
you know since since basically since the
bounce from 286 to 312 since then every
$10 odd mover $15 odd move has been sold
hard but the interesting thing to me now
and I’m starting to see a shift and
we’ll see if we can get confirmation
tomorrow in the next couple of days is
we’re in that two to four we gap down
Monday morning we’re halt limit down the
market basically market stops because
we’re down more than seven percent and
we open we tick down and then we get
back above 240 and we ripped to the
upside to around 255 256 now that didn’t
that didn’t sustain we were reversed in
the afternoon and closed down at 2:40 so
coming into today what are you thinking
the markets gapping up we’ll get below
240 mark it’s gonna tank we’re gonna go
down to you know I not even sure where
the next major support would be maybe
that 235 or something but people are
thinking much more downside thinking you
know 15 $20 a downside at this point
there’s a lot of negativity which again
normally the user ingredients for a
bounce but you know did I think high
probability I was I was thinking okay
well let’s see what happens if we flush
to 40 by a couple of bucks we actually
look at what am i morning game plan
sheet you’ll see right here I have the
levels on there and this is really
important what I’m thinking is we’re
coming in
we’re gapping higher I think we’re
gapping it’s around to 44 or something
like that and I have my three support
levels I have my three resistance levels
so I can use the price action in the
first couple of hours to say are people
interested in buying today and if they
are interested in buying maybe this is
the beginning of something so we had 238
and it says 3-2 42 42 as the first
potential support to 46 r1 to 47 and a
half or two to fifty or three if the
market blows through all of my support
areas then I start to think we’re gonna
fail this is not good we’re going on we
could go to significantly lower prices
if we get through if we get through or
two on the open and then maybe in the
afternoon start to hold above our three
I’m starting to think maybe this is the
beginning
you know we’ve tested to 40 now
yesterday we’ve tested to 40 again we
get a close above our three this can be
the beginning of a larger balance and
I’ll get to what we need to see in order
for that to happen so that’s what we saw
in the charts we closed today basically
I don’t know I actually did this chart I
think before we close but we closed
above 250 and now what we need to see is
a little bit of a compression and
volatility now this has been going on
for a couple of weeks now where we we
just haven’t had that compression since
I guess the beginning of the month today
is the 1617 suddenly the 17th we haven’t
really seen a compression in volatility
in two weeks so the first thing I would
like to see is we’re having these ranges
of about $15 I’d like to see a sub $10
range or a SUP even a sub $8 range
and I’d like to see a start to hold
above to 54 to 55 kind of compress in
there a little bit and if we can
compress Wednesday Thursday and then
break to the upside on on on Friday
include strong I think that’s a
beginning of a larger move first
potential area of resistance if we zoom
out on the 30 minute for the last few
weeks what we can see is clearly I’ve
exited for you there that little range
above 270 like 272 to 274 we had to use
that as resistance on the support on the
way down and we actually gapped below
that a few days ago and since then we
have not been able to reclaim it and
this is the exact same thing I did when
we sold off to 286 I had my first
resistance area around 3 o 2 to 3 or 4 I
believe then above that it was 310 312
very quickly we got to the second
resistance area and then and then
reversed and so what we need to see
tomorrow is you know let’s say we gapped
down tomorrow somewhere in the mid to
40s or something we want to quickly
reclaim to 50 we want to close above to
54 to 55 ish we want to compress for a
couple of days and then we want to break
to the upside and we’re playing for a
move to 72 to 74 if this becomes a
sustained bounce I think best case
because of how much damage
have been done to the market in the near
term is above 280 I highlighted 285 286
ish I’m even like the low to 80s I think
would be a great move 280 I think we’re
at 238 was the low today so that would
be about a 40 for $45 move on a
percentage basis that’s not quite 20%
maybe that’s like 18 percent or 1918 the
20 percent bounce off the low that’s
pretty good over over a week five or six
days something like that so compression
of volatility is one of the things we’re
looking for the other thing that we
started to see today is as the news is
flowing out and so like you know one of
the things I’ll say that for myself
personally that I underestimated we’ve
been watching for about a month very
closely in a number of cases that have
been developing outside the US and
there’s two websites I think I shared
them in a prior video perhaps I can’t
recall maybe I tweeted them out but I’ve
been watching very closely like looking
at the numbers seeing how things are
spreading and trying to get an
understanding of what it’s gonna look
like when it comes to the US and I think
because I was doing that I was a little
bit more comfortable as the news was
starting to flow and as as we kept on
failing and gapping lower and lower I
was like wait a second maybe only 5 or
10% or maybe 20% of the people in the US
were ever paying attention and so now as
more and more people are starting to pay
attention there’s more fear building up
but I think at this point pretty much
the entire country with the exception
maybe some teenagers and some
20-somethings or we’re not paying
attention to these numbers and and that
that anxiety has built up so I’m not as
worried and we’re starting to see that
with the news flow which is there were
just certain announcements intraday that
we’re coming out you know New York City
is made like go into it like a stay at
home lockdown situation which they
didn’t see in Francisco yesterday and
you could see the market just got hit
for two or three dollars pretty quickly
more I didn’t like that but boom it
bounced right back up from 47 to about
50 and we even got up to 52 52 52 53 of
the spies and we saw that in a few
different instances the other thing is
the way that the government has been
communicating and handling is actually
improved it’s easy to I mean from just
my perspective and most people’s
perspective I mean for me it the
information flow from the federal
government
been horrendous up until like the last
few days they’re just you know there is
no pandemic there’s we’re good to go
this was three weeks ago was like we
have 50 cases here we’re good no problem
now it’s basically like this thing may
last through the summer and that that
truth telling people the truth this is
one of the things you hear from the
experts the medical people the pandemic
experts saying just let people know what
the situation is and you get less panic
and people not boarding toilet paper and
acting crazy and so now that news flow
and the federal level is good on the
state level it’s been good for a while
in New York State they’ve been pretty
frank there and they’re having meetings
every day there’s a website talking
about it so I think now that everyone
knows we are in a recession and the
other thing is the federal government
two things number one the the Fed
responded on Sunday night by cutting a
hundred basis points I don’t think
they’ve ever done that before
and basically said we are going to
provide liquidity ten seconds on that on
the Fed the feds job is to make sure the
credit markets function I know everyone
likes saying on Twitter they’re glued
into the stock market and making sure
stock prices go up their job is to make
sure the credit markets function keep
unemployment low and inflation down they
did that and they’re they’re supposed to
do that and you shouldn’t get angry that
they did that because if they don’t keep
the credit markets open whatever we have
our recession we’re experiencing right
now is going to be much much worse you
like to have a Great Depression the
second thing you need to do to actually
deal with a contraction like this is get
money and keep individuals hands and
that’s something that the federal the
government can do it’s called fiscal
stimulus fiscal policy it was very
difficult after the global financial
crisis to get anything done because it
was a Democratic president and a
Republican Congress and it was very
difficult eventually they did get
something done but this time you have a
Republican president you have a
Democratic House who definitely wants to
spend the new fiscal stimulus I mean you
got the Senate Republican Senate but
they’ve got to actually listen to Trump
or he can crush them politically and so
you have a like a perfect setup here for
fiscal stimulus to happen and the news
flow on the fiscal stimulus it started
with the house passing something or a
little rinky dinky thing but it was a
store
and then the scent certain senators who
normally would say no deficits no
spending they’re like we’re doing 500
billion we’re doing a trillion and so
the exceed knowing from Congress the
signaling from the White House is
whatever it takes to get money in
people’s hands and there’s a lot of
people are not going to get paid over
the next few months lose their jobs
people small businesses especially and
then also you have to worry about the
big business is not doing the right
thing that’s always a problem you’ve got
to get money from the federal government
into people’s hands so they can pay
their rent pay their bills get supplies
and keep things going for the next I
don’t know two to five months we’ll see
how this shakes out over the next few
weeks but that all those things are
lining up and so what you want to pay
attention to and there’s a reason I was
talking about that way you want to pay
attention to in the next few days as a
traitor and a person who’s potentially
putting on longer term positions you
know for the next week two weeks is as
the news flow is coming out on the bills
that are gonna be passed as the money is
gonna be how is the market responding is
it holding prices it’s just starting to
move favorably higher and then as you’re
starting to see more numbers come out
new york numbers are gonna go higher
cases in new york city cases in
California cases in Washington the hot
spots around the country is the market
shaking it off you know on these daily
updates if you’re starting to see those
things that gives you more confidence to
build into these positions and
ultimately capture allured remove now
one final point I want to make I tweeted
out the other day I think was last week
you know if we’re getting out of two to
40 I’m going to put on longer term
positions in the past when we would come
down to major support areas I’d always
be like buy the dip you got to do it
this time I was more nuanced or
conservative basically saying
longer-term positions I’m going to do it
I wasn’t so sure I didn’t have the
eighty percent confidence level we would
bounce from 240 back to 270 280 you know
I was more like probably less than 5050
but after today I feel like the balance
has shifted and I’m feeling more like
60/40 we can we can move to the we can
move to the upside on a bigger
you’re balanced and you just need to
look look for the signs over the next
two days that compression and volatility
how we react to the news and ultimately
a couple of other things market leaders
you know the Microsoft’s apples how are
they behaving are they you know holding
above V walk from today things of that
nature and you put that together you
know where your stops are gonna be you
know you have price levels to trade
against based on the price action from
the last couple of days and you know you
have some risk reward here but there’s
upside targets that we highlighted in
the multi week chart that were showing
you right now as always hoped you learn
something here
and if you have any questions about you
know the more up the price action that’s
going on how we’re trading this right
now balances in general please put them
in the comment section below and if you
want to get a better understanding of
the mean setups that we use on our desk
check out trading workshop calm or click
on the link above and we go into detail
the top three restore trading setups
that creators on our desk use to capture
larger moves
