This is a sign of heavy selling and the next leg lower will come.
PRE-OPEN MARKET COMMENTS TUESDAY –Long red candles off of a relative high don’t lie. If you look back at the chart for this pattern you will see that there is follow through selling. It might take a few days or it could happen next week.
The Fed plans to continue hiking as long as inflation remains “hot”, even if that results in a decline in economic activity. Last week Powell cited the mistakes made by the Fed in the 1970’s when they did not keep their foot on the brake and inflation returned. To the extent that QE prevented a credit crisis, QT is going to drain bank reserves. It is a stealthy form of tightening. It will matter and it is happening now.
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.
Tomorrow 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? Who knows!
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 might have a shorting opportunity on the open today. Watch for at least 3 stacked consecutive red candles in the first 30 minutes. If we see that pattern and we retrace more than half of the gap we could see a gap reversal. The S&P 500 has been giving back overnight gains. This is one of the last trading days of the month and those are often bullish with end of month fund buying. If the market gradually drifts lower (mixed overlapping candles and nothing stacked) that would be a sign that end of month buying is going to prevent that reversal.
Given the Fed’s rhetoric and the market reaction last Friday, I am short term (one month) more bearish than bullish. I could cover a few more market scenarios this morning, but I’m not going to because I have a more important message.
WE ARE IN PRE-HOLIDAY TRADING! Pick your entry points very carefully and error on the side of not trading. Don’t piss your capital away. Unless you have at least 3 consecutive long candles in either direction, keep your size small. We need that momentum to increase our probability of success and we are not likely to get it.
Support is at $399.30 (50-day MA) and resistance is at $405.90 (100-day MA).