I Was Wrong – Market Support Is Going To Take Longer To Form

Posted 9:30 AM ET - The market is weak and conditions have deteriorated rapidly. That is usually a sign of margin liquidation. The 200-day moving average will be tested today. When margin calls and program trading drive the action, support levels don't mean much. Fundamentals certainly don't mean anything under these conditions. Traders sell whatever they can and they go to cash. Ultimately this will present a good buying opportunity, but there is pain ahead. We are likely to probe for support early today and we will challenge the 200-day MA. We need to hit an air pocket and we need to reverse sharply intraday. This needs to take place with at least two hours of trading remaining. The market needs to have time to recover and that reversal has to be relentless. Until Asset Managers see this pattern, they won't buy. If the market drifts lower and has a meager bounce in the last half hour of trading, we will continue lower tomorrow. If you look back at the capitulation low in February that is the candle we want to see. A very long wick below the body and a close near the high of the day. That close also needs to be above SPY $258. I did not see this drop coming and I believe many traders were caught off-guard as well. The test of the 200 day moving average on Friday and the bounce on Monday lured me in. Playing these bounces off of major support has worked extremely well in the last nine years. The fact that it did not work this time is a warning sign. My longer-term bias has changed from bullish to neutral for the first time in years. Earnings season will start in three weeks. Strong profits will calm nerves and I am expecting support and a bounce off of this 200-day moving average. Unfortunately, we are going to take some heat before that happens. Swing traders should use the 200-day moving average as a stop on a closing basis. We are likely to test it today, but I still believe we will finish above it. If the market can't finish above that level, we need to take our lumps and go to cash. Day traders should fade the early rally. The market is going to head lower on the open. Look for support at the 200-day moving average. The market could bounce and rally off of that level, but it needs to happen violently. If it does not we are going to fall below it and we will see an air pocket. After that air pocket look for a sharp reversal that rallies back above the 200-day moving average. That will be the capitulation and it will be time to get long. Fasten your seatbelts. We are in for some volatile trading the next two days. . .

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