Posted 9:00 AM ET – In the last few months I have outlined a myriad of issues that are plaguing the market and they are growing, not subsiding. Inflation, war, rising interest rates, supply disruptions, a deceleration in global economic growth, a resurgence in Covid-19 and drought top the list. These issues will not be easily resolved and they will impact corporate profits.
After a 12-year market rally the market bid remains strong and investors are conditioned to “buy dips”. This battleship is hard to turn. As the selling pressure builds, that temptation to buy dips subsides. That means the market bounces are shorter in duration and shallower in amplitude. Buyers start to realize that they will have an opportunity to buy stocks at a lower price and sellers realize that they need to be more aggressive if they are going to reduce risk. Eventually, the bid crumbles and the market hits an “air pocket”. We need to see that deep low.
A weekly chart reveals that red candles are stacking and that the downward momentum is starting to build. This means that we are getting closer to that selling climax. Don’t be early with your buys, the last leg of this drop can be very nasty.
There are many metrics to measure overbought/oversold conditions and the market is oversold. We are due for a bounce and we could get one this week ahead of a major holiday.
Last Friday we took a ½ short swing position on the open (SPY $393) and we will exit the position this morning on the open. The market will open at the high from Friday and it will hit resistance there. I suggest placing a bid at $393. If you are not filled in the first hour buy the position back at the market. Gaps up have been challenged and I expect to see a pullback in the first hour. The volume during the last hour of trading was excellent and I will respect that. Our entry was excellent and I expected follow through selling Friday and over the weekend. We did not get it. Ahead of a major holiday the trading volume will subside so we will close the position and error on the side of caution.
This is a day trading environment and it has been all year. The intraday ranges have been fantastic. The key is to be nimble. If the momentum in one direction stalls, prepare a reversal. In terms of staying with trends, we don’t want the pauses/reversals to last for more than 30 minutes. When you are riding a trend, you do not want to see big retracements against the trend. Those are both signs that the move is exhausted. The opening price from recent long candles is an easy method you can use. You do not want the retracements to move above those opening prices. Apart from an oversold bounce, there was not any news to justify the move higher. If the SPY is able to get through $494 on the first shot and it is able to add to gains with nice green candles, it is a sign that the upward momentum will continue today. This is not likely (20%). A more likely scenario is a retracement with mixed green and red candles. This is a sign of weak trend strength and we do not want to see a pullback below $492. If that happens, the selling pressure will build and we could fill the gap (30%). The most likely scenario is a mild pullback where the market finds support and gradually grinds higher (35%). This will give us time to find relative strength. AAPL, AMZN, FB, GOOG and MSFT need to participate in the rally or it will die on the vine.
Support is at $389.60 and resistance is at $494 and $403.50.