If history is any indication, the index scenario should play out roughly like this:

Lots of noise and excitement was created by Friday’s steep downdraft — among traders anyway.  The news media hardly ever emphasizes stock breaks much these days unless we’re talking like a 10-20 percent Dow decline.

But again, trader sentiment tends to be another story.  Huge downdrafts like Friday tend to make traders position themselves for immediate downside follow-through.  That tends to be the wrong answer — one of those backward adages along the lines of “buy soybeans in the summer to capitalize on the big upcoming drought.”  (Do the research—you never want to be long as of July 1.  The drought almost never materializes, and even when there is some pressure like last summer, beans tend to be, as one trader put it, “a weed growing in a rain forest.”)

But back to the stock market.  We expect an upside bounce on Tuesday.  Research along those lines isn’t extensive — how many 200-point down days can we be talking overall—but the few existing trials do suggest quick recovery bounces.  This is partially dovetailing with what the CzarCharts are saying.  We have just flipped to the long side on the monthly dates.  Other signals in the Nasdaq and S&Ps are mixed, but it’s a pretty straightforward call in the Russell.  All three components in that market urge buying.

Either-Or Biases

The first set of biases includes six biases that individually signal either long or short on a daily basis, except for the rare tie.  Each bias has a +1 value for long bias, and a -1 for short.  The bottom line is the sum total, which can range from -6 to 6.  Positive totals are bullish; negative are bearish.  For bullish signals (opposite is bearish):

1. The 2-day average is below the 5-day average.
2. The close is above the 40-day average.
3. The highest close of the last 50 days occurs before the lowest close of the last 50 days.
4. The day's trading range is smaller than the 10-day average range and the day's close is higher than the 10-day average close OR the day's range is larger than the 10-day average range and the close is lower than the 10-day average close.
5. The close is above the midpoint of the average 15-day range.  (The 15-day high average plus the 15-day low average divided by 2.)
6. Fade the majority direction of the last three open-to-closes.

Infrequent Biases

The five infrequent biases are listed below.  For bullish signals (opposite is bearish):

1. Four successively higher closes were followed by yesterday's down close.  Today's action was irrelevant.  
2. Five successively lower closes were followed by today's up close.
3. CUP trade.  For the last three trading days, the middle day had both the lowest low and the lowest close.  In addition, the low on the middle day must also be lower than the lows from the previous three trading days before the middle day.  (CAP is the reverse and bearish.)
4. The highest low minus the lowest low of the last three days is less than or equal to 20% of the highest high minus the lowest low of the last three days.
5. For the previous two days, the market closed lower than it opened.

Calendar Biases

The calendar biases in the indexes are listed below.  For a more in-depth explanation of these, click here.

Click here for the TradeStation summaries of all 14 futures biases.

DISCLAIMER: It should not be assumed that the methods, techniques, or indicators presented in this column will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented in this column are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The author, Tiger Shark Publishing LLC, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

Art Collins is the author of Market Beaters, a collection of interviews with renowned mechanical traders. Much of Art's TigerSharkTrading.com material will be expanded upon in his upcoming book that is scheduled to be released later this year.  E-mail him at artcollins@ameritech.net.