Watch This Giant Wedge

September 13, 2022

The market is going to breakout one way or the other and we will know soon.

PRE-OPEN MARKET COMMENTS TUESDAY – The market found support at the up trendline from July last week and it was able to bounce above the major moving averages. This morning that bounce will be challenged after “hot” inflation numbers and we are going to test the 100-day and 50-day MAs. A week from tomorrow the Fed is expected to raise rates by 75 basis points and the CPI will keep them in tightening mode.

The Fed has stated that taming inflation is their top priority and they are willing to do so at the risk of slowing economic growth. That is a dangerous tone and one we have not heard in decades. Typically if the economy has a sniffle, the Fed eases. The economic numbers remain strong so the market has been able to fend off fears of a recession.

From a fundamental standpoint if you strip away all the headlines there are two forces in play. On the buy side you have trillions of dollars sitting in cash waiting to be deployed. Investors can’t buy bonds because rates are rising and yields are producing negative returns on a real basis (interest rates are WAY below the inflation rate). This money has to go somewhere and it rotates into the market on big drops. This causes these big bounces. On the sell side, interest rates are heading higher and the question is not if we go into a recession, it is if credit defaults are going to topple this “house of cards”. Credit levels have been at extreme levels from the sovereign level all the way down to the consumer.  I have ZERO idea of which force will win. All I know is that this volatility is creating a great opportunity for day traders and very short term swing traders.

From a technical perspective, the S&P 500 is forming a giant wedge on the daily chart. When we breakout we are going to see follow through in that direction. The upper end of that range is $425 and the lower end is $390.

Swing traders should stay sidelined. There is no reason to try to guess what the market is going to do 3 weeks out.

Day traders should keep an eye on the early action. Was the recent bounce a fake? Are buyers still engaged? We will find out this morning. Stacked green candles in the first 30 minutes will be a sign that much (or al) of this gap will fill (20%). Follow through selling with stacked red candles will instantly challenge the 50/100-day MA and it will be a sign that sellers have control (20%). Our best scenarios are as follows. The stacked green candles would be a good scenario, but I would also welcome a wimpy drop with mixed overlapping candles to the 100-day MA. Then I want a big bullish hammer or bullish engulf on heavy volume. That would have me favoring a nice gap fill and a good entry for longs.  Stacked red candles that blow through the major moving averages would also give us clear direction and 1OP could roll right over on M30 and H1. Instant MA breaches would provide a clear path to $390. The best bearish scenario today is an instant test of the 100-day (happening now). Then a wimpy bounce with mixed overlapping candles that stalls quickly. That would set up an excellent entry point for shorts and we are likely to breach the MAs on the next move down.

A few things should be clear from my comments. 1. I have no idea of what the hell the market is going to do. 2. There is a major wedge formation on SPY D1 and the breakout one way or the other will have longer term legs. 3. I am just watching the price action and I am sticking to day trading.

Support is at the 100-day MA. Resistance is at the 50-day MA and $407.50.

A breakout above $425 or a breakdown below $390 will tell us which way we go.


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September 8, 2022
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