Here’s what happened the last time.
PRE-OPEN MARKET COMMENTS MONDAY – Last Friday the market was bracing for the Jackson Hole speech from the Fed Chairman. This was like waiting for an FOMC statement and it did not disappoint. The rhetoric was hawkish and it was consistent with previous statements. They plan to continue hiking as long as inflation remains “hot”, even if that results in a decline in economic activity. He also cited the mistakes made by the Fed in the 1970’s when they did not keep their foot on the brake and inflation returned. The S&P 500 is down 30 points this morning and that represents a 4% drop since the open Friday.
This was the last time we will hear from the Fed in a month and the market gets very nervous when no one is at the helm. The message was somber and Powell signaled that investors should not expect easing in 2023.
The last “shock” like this came June 9th when the Fed signaled that it was leaning towards a 75 basis point rate hike at the next two meetings and 50 basis points was priced in. That ensuing decline set the low of the year.
DC is also in recess. All of the skeletons will come out of the closet in the next month. The headlines will be filled with gloom and doom, a 180 degree shift from what we heard earlier last week. Tensions with China will increase, supply disruptions will take a turn for the worse, the drought and war in the Ukraine will keep food prices high and credit issues will surface. This pattern is very typical for August/September and these are the weakest months of the year.
I am not discounting any of these influences, they are real. My point is that if you rely on the media, you will always be one step behind. Instead of positioning themselves between the ball and the net, they are the child chasing all of the other soccer players.
This week we will get the “new” ADP report. They have changed their reporting methods so it might not carry much weight. I like this report because they process payrolls and they know how many checks were cut. Friday the jobs report will be posted. Initial jobless claims have not spiked and I believe that employment will remain strong. Is good news bad news because it will give the Fed room to tighten?
China is struggling and the PBOC is easing when the rest of the world is tightening. Covid-19 is still plaguing the country and there are electricity shortages due to low hydro output (drought). This is causing a fresh round of supply disruptions. As you know from my previous comments, China is my greatest market concern.
Swing traders will have an opportunity to sell out of the money bullish put spreads when the market finds support. We have been waiting for a market drop, but we did not know how deep it would be or how long it would last. Given the price action Friday, we could be in a holding pattern for a few weeks. I did like the marginal new low in June and I liked the duration and magnitude of the bounce the last two months. I still feel the low of the year will be preserved, but there is no need to guess. Let’s wait to see how low we go.
Day traders should focus on two thoughts today. 1. The market is not going to have a meaningful rally until the downside is tested. 2. Look for opportunities to trade from the short side. Buyers will put their wallets back in their pockets after Friday’s performance. Our best scenario is a wimpy bounce with mixed overlapping candles this morning. When that bounce hits resistance be ready. You can see from the price action back in June that moves of this magnitude have follow through. If the first move lower has mixed overlapping candles and tiny bodied candles, we are going to get a bounce. Early short sellers will get squeezed. That bounce would set up a good short. It might not last long. Watch for a long green candle that fails quickly. Stocks have rallied nicely in the last two months so they have plenty of downside. Look for broken D1 up trend lines and breaches of major MAs on heavy volume. Those will be your best prospects. We are heading into a holiday and light volume favors the current trend.
Support is at $399.30 (50-day MA) and resistance is at $405.90 (100-day MA).