On Friday, Oct 27th, 2008, SPX touched it’s 2009 channel bottom near 2630 for the first time since Feb 2016! Predictably, it bounced over 60 points before coming back down. First touches are nearly always bought hard.
Being a Friday, when you have weekly close, it is unlikely it would close below 2630. It just doesn’t do that on a bull run channel bottom on first touch in years. But that doesn’t preclude the possibility of it testing that low, and possibly lower, as early as Monday. Measured move targets on multiple time frames are at 2606 and 2601. That will likely be bought. But, in case it goes lower, the weekly 100 SMA on SPX is 2675. Then, of course, you have the prior Feb low near 2532.
If we hit a bottom this week, and it reverses, then what? Good question. The number of weeks between tests of the bull run channel low have ranged from 4 weeks in 2016 to 13-14 weeks in prior bull runs. Keep in mind that every time is different, though, so this is a guide, not a guaranteed outcome. What’s behind this one, in addition to rising rates, is the simultaneous $75b of US treasuries being sold by the US Treasury (UST) per month to finance our budget deficit, as well as $50b of US treasuries being sold by the Federal Reserve Bank (FRB) as part of their balance sheet reduction, aka Quantitative Tightening (QT), as well as who knows what else they are selling. This last part is unprecedented.
$75b per month is high enough. Usually the FRB is buying some of those. But, now, instead of buying, the FRB is selling, bringing the total to a historically high $125b per month!
That said, let’s look at what happened in 2016.
In 2016, it did a perfect 50% touch before going down. In SPX, a perfect touch is within 1 point. Then it went back down to test the low. Then up up up and away.
Now our current 2018 setup puts half way back (HWB) at 2784.
Keep in mind, though, that the bottom before going up may not be in, yet. Monday can easily put in a lower low and hit our target of 2606. In that case, we’ll need to redraw this fib set to locate our new HWB, lower than 2784. If we our new low is 2606, then HWB becomes 2772.93.
The point is, based on prior first touches of channel bottom, this is a buy for a HWB run up. If we get a weekly open significantly below this channel bottom, like below 2600, then it’s game over, and you’ll look to get out, ideally for a small profit. But risk/reward is very much in your favor down here. You can’t get a much better swing low setup long.
Here’s the big picture 2009 bull channel: