My market bias for the next few weeks is bearish. The price action since the FOMC has been weak and I do not see that changing with a 50 basis point rate hike pending a month from now. The S&P 500 is down 16% from the high and it is in correction territory. The QQQ and IWM are both in bear market territory. We can expect short covering bounces along the way and we are seeing one this morning. The S&P 500 is up 45 points before the open and traders are expecting a tame CPI report.
Swing traders with a 3-4 week trade duration should wait for a capitulation low. Now that the market has broken key support on sustained selling, we are likely to see acceleration to the downside. After a 12 -year bull market, the bid was going to remain strong during the first phase of this topping process. Now we have reached a point where buyers are no longer worried about missing the next big bounce. They are much more passive and sellers have control. Short term swing traders can sell out of the money bearish call spreads on stocks that are below key technical support levels and that have relative weakness. Sell those out of the money spreads above technical resistance. Avoid stocks that have been pounded senseless and that have tiny bodied candles. They are likely to see short covering rallies.
Day traders should continue to see nice daily ranges. I am expecting a short covering rally on the heels of a tame CPI report. In the past, “hot” CPI reports have NOT sparked selling. Consequently, surprise favors an upside market reaction. Analysts are expecting a .2% increase in inflation. From a fresh low for 2022, the market has the potential for a gap and go formation (20%). Stacked green candles with little to no overlap on the open would justify early buying. Watch the $406 level (resistance).The release is 15 minutes away and the bid is firm into the number. A gap up of this magnitude would not typically result in a gap reversal since we are at the low end of the range (10%). Asset Managers do NOT feel that this is the last chance to buy at this level. A gradual drift lower on the open is one of the more likely scenarios (30%). Watch for mixed candles with overlap. Bulls do not want to see consecutive red candles and the SPY needs to stay within 20 points of the opening price. This will be a partial gap fill and it will present a good entry point for longs if support is established in the first hour. It is also possible for the market to tread water near the open for 45 minutes. That would be a bullish sign since sellers are not able to knock the market down. That would be a sign that the market is going higher.
Pete, “I’m confused.” You are bearish, but you painted a bullish picture. I am bearish on a swing basis, but I believe that we will see a relief rally. Once the momentum is set, program trading kicks in and the move feeds on itself. The market does not go straight up or straight down and that is apparent in the D1 chart. Do I feel that the market will make a new low for 2022 before the next FOMC statement? Yes.
Here is the key today. Watch how the SPY attacks the $406 level. If we blow through it on the first attempt it will be a sign that buyers are fairly aggressive at this level. If the market can’t penetrate that resistance level after a few tries it is a sign that this is just a relief bounce and that sellers are still in control.Keep your trades short-term and remain flexible.
Support is at SPY $395 and $400. Resistance is at $406 and $414.