The action today was slightly more bullish than expected – despite negative early futures, the Dow opened higher and back-tested 8130, instead of the anticipated 8100, but everything else worked out just as predicted in the last two posts on my site. We are still carrying over some positive momentum into tomorrow, which will likely mean a bounce for the Dow to the 8380 level (also the 38% fib retrace of the move off the June top). The possibility that we’ll hit the critical 911-914 resistance on the S&P (also the top of second left shoulder and 50% retrace from top) is less likely, but it does exist. I surmise that the up movement will be on the rebound of the USO (and tech), as many indicators suggest – and we should again see the daily switching off of the financial and energy sectors to lead the indices higher.

However, due to the fact that we’re really overbought on the daily interval, a lower close is anticipated. So the rally (i.e. short squeeze) should stall for at least one day in the form of a 4th Elliott wave, and then we’ll see if we’re setting up for a strong shoot lower, or if we move up to make the second right shoulder of the H&S pattern on the daily (as well as the 5th and final wave of this move up).

The 75% probability of tomorrow’s lower close was found by simply combining the overbought tick and down volume levels to see how many profitable trades were made in the past by shorting on a day like tomorrow (see trade summary). By the way, for my own trading it really helps to quantify a day’s bias to help minimize the emotional/intuitive aspect of trading, and I hope that it’s been giving you an edge and better feel for the market as well…I somewhat liken it  to quantifying risk with stops prior to placing a trade.

One other thing to consider is that the VIX today fell unusually low with respect to longer-term gauges of volatility, which may also be indicative of a move lower tomorrow. Chart below found on Cobra’s blog:

Though the banking index ($BIX and $BKX) is possibly breaking out of a long-term descending wedge, it looks like the bias is negative for tomorrow: