BarroMetrics Views: S&P Approaching Inflection Point? V

We saw a strong rally across the boards following Mario Draghi’s words in London that the ECB will do “whatever it takes” to save the euro within limits of its mandate. “Believe me, it will be enough”. (The Telegraph)

My normal approach would call for a closing of my short positions on today’s expected pullback; the question ‘continuation or change’ would be answered: “continuation up” (based on the tests I use to answer this question, the Normalised Volume, Buying Control and 50%).

But in a situation such as this, the normal approach would not be the best one. When there is an unforeseen news event, I by-pass the technicals and adopt Pete Steidlmayer’s classification method. I ask,  is this a

  1. Surprise event or
  2. Unexpected event.

A surprise event means the underlying direction re-asserts itself. In this case, the underlying direction was down. An unexpected event is one where the ‘news item’ changes the underlying direction.

The Telegraph article poses the two problems facing the ECB in its attempt to emulate the FED’s QE:

  1. The legal restrictions imposed by its mandate, and
  2. The German’s public growing resistance to more bailout. Germany’s support is a ‘must’ in any attempt by the ECB to by-pass its legal restrictions.

Given the above, I’ll assess Draghi’s comment as a ’surprise event’. So, what to do about the short position at 1364?

  • Leave the stop at breakeven.
  • Today, we should see a down close - we saw a trend day yesterday and ‘trend days are not good continuation days unless they are the start of a new trend’. In addition the it’s probable that the market is now want to see the ECB deliver on its promise in its meeting next week. That being the case, this supports the view of a rotational down day.
  • If my assessment is correct, this down move will show at least normal Normalised Volume (and Range) and strong selling control.
  • Failure to meet either of those two conditions will lead me to exit the shorts at the close of July 27’s trading.