S&P 500 Technical Breakdown

July 14, 2022

An important trendline will be breached this morning. It paves the way for more selling.

PRE-OPEN MARKET COMMENTS THURSDAY (7/14/22) – The CPI came in hot at .7% yesterday and the market shrugged it off. This morning the PPI came in at a scorching 1.1%. The S&P 500 was already down 50 points so this news was not the catalyst for the drop. Overseas markets were soft and earnings season has started on a sour note. Click the link to watch today’s video.

The market reaction to inflation has been muted for many months. We have been hearing for the last year that inflation is going to ease… inflation is going to ease. The market still believes this and it discounts the news.

JPM reported a 28% decline in profit this morning. They are seeing signs of an economic slowdown and they increased bad loan write downs. Banks are the oil that lubricates the economy. The next week will be dominated by bank earnings releases. The XLF is a financial ETF and it has a bearish flag formation on a daily chart. I don’t believe the market will be able to stage a sustained rally without this sector and without tech stocks.

Recessions, rate hikes, inflation and war can lead to temporary market declines. A possible credit crisis is what concerns me. I do not like what I see in China (local banks limiting withdrawals) and emerging market yields.

Yesterday the SPY tested an upward sloping trend line on a daily chart. Right out of the gate we retraced much of the gap and that was a sign that buyers are still engaged. After a second blow (JPM/PPI), I am not expecting a repeat performance. I believe that we are going to test the low of the year in July.

Day traders should wait for the early action to unfold. If the first 3 candles are long and red with little to no overlap, we are going to get a “gap and go”. That means you will have to act quickly on shorts and that the drop will run its course in the first 90 minutes and compress the rest of the day. I don’t like to chase and I feel this scenario has a 20% chance of playing out. The bounce yesterday was a sign that buyers are still engaged and I would trade smaller size on a gap and go for fear that there could be a big bounce along the way. A more likely scenario is that we get a meager bounce on the open. Buyers will remember the nice rebound from yesterday and they will test the water early. A wimpy rally with mixed overlapping candles would be our best scenario and it has a 30% chance of playing out. When the bounce stalls you will see compressed tiny candles and/or a bearish engulf/bearish hammer off of the high. That will be your sign that the market is going to reverse. A mixed open with lots of long green and red candles is the most likely scenario (40%). That is a sign that bulls and bears are going to fight it out. You have to let the action settle down and you have to wait for a clear sense of market direction. You will get your trading windows, be patient if this unfolds.  

Support is at SPY $372 and resistance is at $380.


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