I read a quote yesterday from a trader that nicely sums up the past two months price structure in equities.
The trader looked at the early August low as a momentum low, whereas the markets are now currently searching for a price low. From my studies of the markets momentum and technical framework - I would agree. It has also been one of the main reasons I have continued to work from the long side in equities as an opportunistic trader, because I feel there is an underlying bid as we traverse the range.
Sometimes the market's momentum low is lower or equal to fair price - such as in 1987 when the market crashed with such inertia that both lows were satisfied at once. This was reinforced two months later when the market retested those levels and failed to break the intraday low established in October 1987. The market had successfully purged its considerable excesses of price and momentum (e.g. sentiment) and was ready to climb the now heightened wall of worry.
Yesterday, the market embarked upon its own exploration of price by extending briefly below the bottom of the corrective range. This was a necessary step in determining where long term support for price would be met. Considering the violent and reflexive rally away from 1075, traders can infer a degree of confidence that an intermediate term low had been satisfied.
To further back this conclusion, I reviewed an indicator that can give traders an idea at how extreme the nature of the move had been within the market. As mentioned in my previous notes, I like to look for extreme readings in various indicators to wash out the noise and to help determine where a market may be headed. After reviewing the USHL (SPX new highs minus new lows) after the close, the market did exhibit extremely low readings that would indicate at the very least that a short term low had been met.
It is interesting, but not surprising to this trader, that when you contrast the nature of the move in the USHL to the next closest market environment, it would be 1998 - the last strong momentum market that was hit with a sovereign debt crisis' fat tail.
Based upon my previous work with the gold/silver ratio, and if history is any guide this time around - the market should have made a very important low yesterday.
Just remember to stay frosty - you never know if this dog has two tails.
