This is the pattern to watch for this week. Perhaps even today.
PRE-OPEN MARKET COMMENTS MONDAY – The market is weak and it is down 180 S&P 500 points from the high last Tuesday. The volume has been heavy and we closed below AVWAPQ, the 200-day MA and an up trendline that dates back to October 13, 2022.
Last week, Fed Chairman Powell reiterated the “higher for longer” message and 10-year yields spiked above 5% for the first time since 2007. Inflation has been steady and the Fed believes that it will not come down until economic growth decelerates. The impact of higher interest rates is going to eventually lead to slower economic growth and we are seeing signs of it (Beige Book). Consumer debt levels are at historic highs and the cost of financing that debt is high.
This week mega cap tech stocks will report earnings. Valuations are “rich” by historic measures (forward P/E) and there is room for the market to drop.
Thursday, we get the first look at Q3 GDP and Friday the PCE deflator will be released. Since this is the first reading, the numbers will be important. Remember, this is a backwards looking number.
So given this backdrop, “Why is Pete looking for a capitulation low here?” The price action does not suggest that this is going to happen. That observation is correct and that is why we don’t trade what we think is going to happen, we trade what we see. Trading is about awareness and after 30+ years of doing this, I have “seen this movie before”.
I told you in August we were likely to see selling pressure that would last into October. Now I am telling you that we are likely to see strength into year end.
I referenced October 13, 2022. The trendline started one year ago. That was before all of the mega cap tech stocks reported earnings. The S&P 500 had also lost 300 points in a matter of a week heading into that day. The market gapped down to a new relative low and it finished on the high of the day leaving a giant bullish engulfing candle. The key is that the market gapped down and we had a reversal early in the day. Then the market spent the rest of the day recovering those losses and it rallied above a number of previous closes. That is the price action we are looking for right now. In the chart you will notice a new low on September 30th and then a gap higher on October 3rd. That is NOT how these lows form. We need the gap down and the reversal. That is a sign that buyers are aggressive and they will be looking for that price action.
No matter how dire the news is, in October we always hear, “This time is different.” The news is really, really bad and there will not be a year end rally. If you feel this way, you don’t have to buy, but I urge you not to short if you see a bullish engulfing candle or a bullish hammer off of a relative low right here.
Overseas markets were weak and the S&P 500 is gapping down overnight. I don’t know if that capitulation is going to come today, but it could. I will be looking for an early low that barely lasts an hour and that has stacked green candles on heavy volume. If you have a lot of swing shorts, you need to set buy stop orders above the current price on your shorts. When this move comes it will be fast and furious. You do not want to be scrambling to enter buy orders. Prices will rip and you will be chasing “asks”. You can use trailing stops for your shorts, but I would not use them for options because the bid/ask is too wide. On a reversal, the market makers will spread those bid/asks even more. For stocks that you want to buy, you should have alerts set at very least. You can set buy stop orders above the current price and those will get you into the trade. Only use starter size and then add on price confirmation. If the reversal does not happen, you are no worse off. You can continue to manage your shorts. This preparation costs nothing.
I am not looking for a gangbuster move higher. Once support is established, it is likely to look like the rally we had at the end of last year. Mixed overlapping candles and a grind higher.
I have been through many of these and I hope you take my advice.
Support is at SPY $420.60. Resistance is at the 200-day MA.