Cycle Trading

After dropping over 3% on Wednesday stocks bounced back on Thursday to indicate a new daily cycle.

On Wednesday stocks delivered bearish follow through to the undercut from Tuesday. When stocks printed the day 40 low, in real time it did look like a DCL. But failure to break above the 10 day MA soon gave way to another round selling. The selling undercut the day 40 low. Often times an undercut low in the timing band for a cycle low is a bullish signal because during periods of extreme sentiment we run out of sellers on the undercut allowing a bottom to form.

And the bottom may have formed on Wednesday. A swing low is required to form a daily cycle low. While stocks did not form a swing low on Thursday they did gain back over half of their loses from Wednesday. Another indication that Wednesday was day DCL is the bullish divergence that continues to develop on the oscillators. Often times these bullish divergences precede a cycle low.

There was also a bullish non-signal on Thursday. There was no Selling on Strength numbers from Thursday. Selling on Strength typically results in near term market volatility. So the absence of any Selling on Strength from Thursday is another signal that the bottom is in.

Stocks still need to form a swing low to complete the daily cycle low. A break above 2742.59 will form a swing low. Then a close back above the 10 day MA will signal the new daily cycle. And since stocks are rallying out of what I believe an intermediate cycle low, we should see a confirmation day with stocks rallying for another 1.5% on the day.