Eyeing Mean Reversion Lower

Last weekend I wrote that "my read on the market right now is that we tag somewhere in the 3290 to 3330 area in the coming week which then turns the market lower on an intermediate timeframe. So let us be on the lookout for a short trade to set up in the coming week once the secret indicator combo also joins the sell side."

What actually happened is the Emini S&P 500 (ES) got to the 3330 area, and after chopping around for a bit the market exceeded that spot to end up close to 3350. 

As we look ahead, internals are neutral to slightly bullish but not really supportive of where price is right now. Options data looks quite bullish, but our Razz analysis (which tracks the "smart money" vs "herd" in options trading activity) is clearly showing a top and pullback setting up very soon.  Our service's Composite Signal stays on buy (which happens when at least 2 of our 3 primary short-term indicators signal a buy), but this has been one of those situations where the odds indicators has not been supportive of the long side after the whipsaw experienced by it at the end of July.  Right now odds have gone to "no call," which means it is supportive of neither long nor short right now but leaning toward a short side setup triggering next week. We also need the composite signal to support the short side before taking a trade, and with the micro1 and SI combo triggers getting tighter and tighter, we are very close to a sell signal and short trade setting up. My read on the market is that we are advancing on price with mediocre internals and this kind of move generally results in a mean reversion back lower.

So while we are flat right now, let us wait for the indicators to actually signal a sell before entering any short trades. I think we will get more clarity on what next this coming week. 


Here's what our ES Grey Zone support and resistance areas are telling us.  Grey zone resistance is at 3338-50 and at 3385-96. Support is at 3310-3300, 3280-69 and then at 3256-46.

For Monday, daily pivot is at 3339. Resistance R1 is at 3356 and R2 at 3364.5. Support S1 is at 3330.5 and S2 at 3313.5.

All the best to your trading week ahead.

Princely Mathew hosts The Smart Money premium service at ElliottWaveTrader.