Bearish Market Pattern Today

June 30, 2022
Author: Peter Stolcers, Founder of OneOption

The S&P 500 is going to finish Q2 on a sour note. Last day of the quarter.

PRE-OPEN MARKET COMMENTS THURSDAY – By now we are all aware that the market is in a down trend and that the “trend is your friend”. Early in the year, the drops were bought with conviction and the bounces lasted weeks and the retracement was significant. The “buy the dip” strategy that has worked well over the last decade stopped working. As the market decline matures, buyers become passive. That means the bounces are relatively brief and shallow. The bounce off of the 52-week low only lasted a few days.

Long candles often help us determine the strength of a move. If we stack two of them together or the same color they are significant. Long candles are often followed by a pause. If that next candle stays near the close of that candle it is fine, but there has to be follow through. I mention this because of the long green candle we saw last Friday. The week started off on a quiet note and the gains from Friday held up well on Monday. However, we needed immediate follow through Tuesday. The gap higher looked good for the first few minutes, but then it crumbled and a full blown gap reversal was underway. The market closed on the low of the day Tuesday. That was a particularly nasty move because it formed a bearish engulfing candle and all of the gains from Friday were erased. Wednesday was a day of rest and the market finished near the close from Tuesday. We were faced with a similar pattern and we needed follow through today to validate that long red candle. The S&P 500 is down 55 points before the open this morning and we are going to get that validation.

These long candles need immediate follow through for confirmation

This should not come as a surprise. The trend is lower and the bounce was just that. Of interest is the fact that the bounces are shallow and brief. That is a sign that the downward momentum is gathering steam. I referenced this in my comments yesterday.

China’s PMIs came in better than the “street” expected. Non-manufacturing was 54.7 vs 50.5 expected and manufacturing was 50.2 vs 50.2 expected. The IP number they posted a couple of weeks ago met immediate resistance from analysts and they disputed it. The strong PMI’s did not surprise Chairman Xi because he vowed that China would hit its growth projections this year. I would hate to be a data collector in China.

Initial jobless claims were unchanged from a week ago, but you have to be careful with those numbers into a holiday. Workers filing for unemployment benefits often postpone the application and we could see a small “pop” next week. Chicago PMI will be released 15 minutes after the open so beware. ISM manufacturing will be posted Friday after the open. The PCE deflator (used by the Fed) came in “hot” yesterday and inflation is alive and well.

Asset Managers are not going to aggressively buy until some of the looming issues have been resolved. The Fed is ready to hike rates 75 basis points in July and then they are going to vanish for 6 weeks (recess). The parting message will be, “Expect higher rates at the next meeting in September.” Asset Managers will not like being on auto-pilot when inflation is surging and the likelihood of a recession is increasing. One bad series of economic releases will send the market lower and the Fed will not be around to comment.

By some estimates, Baby Boomers own 55% of the money invested in the market. They can’t shoulder another correction. Baby Boomers are retiring and they are risk adverse. They are going to the sidelines and headlines of war, inflation, higher interest rates and huge market drops are going to keep them in cash the rest of the summer. Baby Boomers are a large percentage of the investment community and it is important to note this change. They have gone from a “buy and hold” mentality to a “not going to go through another melt-down” mentality.

We don’t need fundamental analysis, but I thought this might add some color to the technical picture and why the selling pressure has been so heavy.

Swing traders stay in cash.

Day traders beware of the Chicago PMI after the open. You should not be trading the first 15 min anyway (unless you are taking gains on overnight shorts). We are getting follow through selling after the bearish engulf on Tuesday. I expect to see a bearish trend day today. This is the end of Q2 and it is going to be a nasty one. We have a bearish flag formation on D1. Any bounce today would be a gift. Let’s see if we get any lift during the first 30 minutes. Mixed overlapping candles would be a sign of a weak bounce. When that move stalls it will be a good entry for shorts. I doubt we will get much of a bounce. Here is the rub. WE DON’T WANT TO CHASE IN LIGHT PRE-HOLIDAY CONDITIONS. The move lower is in the direction of the longer term trend and that is good. The worst thing you can do is to rush into trades and to take losses under these conditions. Remain calm and wait for your set-ups. The ranges have been big and you will have your chance to make money. Remember that stocks tend to drop in big chunks and then retrace. YOU DO NOT WANT TO SHORT THE LOW OF THE DAY ON A LONG RED CANDLE. That is where you want to take gains on shorts. After those long red candles, wait for a bounce. If the bounce can’t recover the open of that long red candle, if the stock is still weak relative to the market and if the market is still weak, consider entering. Look to short on stalled bounces and take gains on long red candles at the low of the day.  

Support is at $373. Resistance is at $378.40.

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