Until You See This Pattern – Stay Bearish

September 23, 2022
Author: Peter Stolcers, Founder of OneOption
Author
Pete

The market is within striking distance of the low of the year.

PRE-OPEN MARKET COMMENTS FRIDAY – The S&P 500 is one nasty day away from the low of the year and we have a negative seasonal bias that will last a few more weeks. Central banks around the world are tightening and the likelihood of a recession is increasing.

From a trading standpoint know that the market does not go straight down. It finds resting points and it bounces. The SPY is riding the lower end of the Bollinger Band and we have typically seen bounces when we hit these levels. Does that mean buy? No, it means you should take gains on your swing shorts if you see signs of support.

I will be watching for a lower low (we already have that overnight) and a close that is above the prior day’s low (ideally a close above the prior day’s close). That would be a bullish hammer and it would be a sign that the market is ready to bounce for at least a few days. In order for that to happen today, it would require a 50 point bounce from the overnight lows. That is a tall order, but possible. That is how these support levels are established.

That bounce will provide you with an opportunity to re-short when it runs out of steam. Until we see this pattern we have to favor the short side.

On the bullish side of the ledger we have mountains of cash looking for a home. With interest rates moving higher, Asset Managers are sitting in cash/short term treasury notes. They won’t chase rallies, but they will buy dips. Corporate buy backs will also keep a bid to the market. Bonds and stocks are producing negative real returns and it is a really tough environment for longer-term investors.

On the bearish side, the headlines are alarming. Putin is threatening a nuclear strike, Xi is increasing military exercises around Taiwan, drought is plaguing much of the world and that is impacting food supplies, inflation is at 40-year highs, analyst projections for earnings/economic growth are being lowered, Covid-19 is still creating supply disruptions in China and central banks are tightening like mad. There are many dark clouds and the media never misses an opportunity to “fan the flames”. They love to stoke fear and this is fairly typical in September.

From a day trading standpoint the move lower is within striking distance of the low of the year (90 pts). I do not want to chase the drop, but the overnight selling pressure has been steady and drops of this magnitude tend to have staying power. Stacked red candles consecutively will be a sign of heavy selling pressure. If I join this move I will do so with ½ the normal size. I want to limit my exposure to a short covering bounce. As the move continues I can always add once I have confirmation. Our best set up is a gradual drift higher to try and fill some of the gap. We want mixed overlapping candles and I do not want to see more than half of the gap filled. When that bounce stalls a good short will set up.

There is a chance that we see a pattern which would be bullish if it materializes. I would only give it a 10% chance, but I will be watching for this. We will see a nice opening drop and a long bullish hammer or a bullish engulfing candle on the low of the day. That will be followed by 3+ long stacked green candles. There must not be any dojis or red candles between them. This exact pattern would be a sign that we have hit support and the buying needs to be brisk and relentless. We need to take out the high of the day with ease and we start filling the gap on the first attempt. This needs to happen early in the day (first 2 hours). If you see this, take gains on swing shorts and trade from the long side. This is a VERY specific pattern – ACCEPT NO SUBSTITUTES.

Support is at the low of the year and resistance is at $373.50.

This is what a capitulation low looks like.

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