Bulls fumbled the ball on Friday.
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Don’t Forget: The Long-term performance of the S&P 500, some longer-term setups, and 5 red flags that showed up before the 2022 bear market.
Our View
If there was one indicator that predicted Thursday’s 86-point selloff then 195-point rally and Friday’s 142-point decline, it was the VIX — AKA the fear gauge — when it ran up to $34+ earlier in the week.
Of course, Thursday’s CPI number had a lot to do with it, but when the VIX started moving higher earlier in the week I think it was a precursor of things to come. This type of price action is called WHIPSAW.
I know for many people this is a very hard time and when the markets tank, the public gets scared. But when it makes a new low as it did early Thursday and rallies ~5% off that low, the scared people get bullish again and start saying “the low is in.” However, what they forget is that every rally so far in 2022 has been a “dead-cat bounce.”
Every. Single. One.
Time and time again I have said that traders have never seen the likes of what we are seeing in 2022. I have even said that many of these big moves are what I call ‘mini-flash crashes’ and that they have become so commonplace in 2022 that most people are becoming numb to them. That in itself is not a very good sign.
Going into Thursday’s CPI number, the S&P had been down 16 of the last 20 sessions, so while I have been bearish I have also pointed out many times that the markets have been very oversold.
To be honest, that makes it hard as a trader. You don’t want to get caught offside as the bear-market rallies are powerful. Yet you know what direction the trend has been in.
According to the American Association of Individual Investors (AAII), sentiment had also grown increasingly pessimistic. The share of individual investors who believed stocks would be lower in six months’ time rose last week to 56%, hovering above its long-term average for the 46th time in 47 weeks.
According to Goldman Sachs, the S&P 500’s 27.5% decline this year has put it on course for its worst year since 2008 and is greater than the median peak-to-trough decline for stocks in recessions going back to 1949. I know the markets will find a low, but I’m just not sure if it’s going to be this year.
Will there be a year-end rally? I think the odds favor it, but it’s highly unlikely the S&P 500 will bounce enough to erase the non-stop pain the market has handed out.
Our Lean — Danny’s Take
This week is going to be another big week of corporate earnings with BAC today, JNJ, GS, and NFLX on Tuesday, and TSLA on Wednesday, among others. Economically, it’s not too bad, although it is monthly Opex on Friday.
I’m looking to sell an initial rally into the 3662 to 3680 area. That’s the 50% to 61.8% retrace zone and is again highlighted in the section below.
If the bulls reclaim this area, then 3700+ could be back in play. A gap-up early in the week could fuel a larger squeeze, but that does not mean it will end in a bullish manner.
We don’t want to get steam-rolled at 10 a.m. on a Monday, just keep that in mind. Use stops, be smart, trade well!
Technical Edge
- NYSE Breadth: 83% Downside Volume
- Advance/Decline: 82% Decline
- VIX: ~$32
Game Plan: S&P, Nasdaq, Bonds, and the Dollar
Thursday’s reversal ended up giving us a near-80% upside day. It would have been greedy to ask for a 90%+ upside day, but it doesn’t matter now. We needed another 80%+ upside day on Friday and instead, we got an 80% downside day as the S&P 500 coughed up 2.5% and the Nasdaq fell 3.1%.
Bulls may feel good coming into Monday with modest 1%+ pre-market gains in the indices, but Friday’s action is hard to ignore. I think we need to remain defensive.
Remember to keep an eye on the dollar and on bonds for clues on the S&P.
S&P 500 — ES
My biggest piece of advice right now? Be patient and #KISS. Just remember that these are difficult environments, we don’t want to force anything with a poor R/R, and let’s try to keep things simple — i.e. are we above or below active support/resistance? Are we above or below a key level?
In the ES, notice we’re below active resistance via the 10-day and 21-day moving averages. We’re below the June low, too. Notice Friday’s rejection out of the 3725 to 3750 zone as well.
From here, I want to see if the ES can push through the declining 10-day and the 50% to 61.8% retrace zone at 3662 to 3680.
If it’s rejected, watch 3639 as the key pivot. Below it could put ~3600 in play.
If it’s accepted above 3662 to 3680, then 3710 to 3725 could be next.
S&P 500 — SPY
Again, SPY was flat-out rejected from a key area on Friday after that bullish reversal on Thursday. Gapping higher on Monday now, the $363.50 area is going to be key — if it can get there.
That’s the 50% retracement of Friday’s range and the declining 10-day. If it can clear $365.50, then $370+ is back in play.
However, if this zone rejects it, then bulls must keep an eye on Friday’s low.
Nasdaq — NQ
The NQ acts weaker than the ES, as it continues to build below the September low and the June low.
If it gets above and stays above the September low of ~10,890, then it opens the door to the 10,990 to 11,050 zone, which is the 50% to 61.8% retrace area of Friday’s range. The top of that zone is also where the declining 10-day ema comes into play, along with the June low.
To me, that would be a key area and a zone where both bulls and bears will look to gain control.
Bonds — TLT
Bonds still look like crap.
Bulls need $100.50+ and to clear the 10-day, which has been very active resistance. It’s as simple as that. A break of $98.25 opens up more downside.
Dollar — UUP
Hard to make the case that the dollar looks all that bearish.
Weekly-up over $30.58 could put the highs back in play, which would be bearish for equities.
You don’t need to trade the dollar or bonds, but use them as clues on the indices.
Go-To Watchlist
*Feel free to build your own trades off these relative strength leaders*
- Numbered are the ones I’m watching most closely.
- Bold are the trades with recent updates.
- Italics show means the trade is closed.
Notes:
- FSLR — Not great price action yesterday, but closed well. We’ve got one trim already. If you’re still in (or just got in), Thursday’s low (~$120.50) is a good stop (unless you are still going with a B/E stop, then that’s fine too.
- I am trimming again in the low $130s if I see it down to a ½ position.
- XLE —Down to ⅓ to ½. $87 to $87.50 could be next up as we go monthly-up. B/E stop now.
Relative strength leaders →
Top:
- LNG — nearing the breakout near $150
- MCK — Stopped earlier but still holding the breakout near $340
- CAH
- LPLA
- CCRN
- FSLR
- REGN
- ALB
- VRTX
- CYTK
Economic Calendar
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