My market bias for the next few weeks is bearish. The price action since the FOMC has been weak and I do not see that changing with a 50 basis point rate hike pending a month from now. The S&P 500 is down 16% from the high and it is in correction territory. The QQQ and IWM are both in bear market territory. The small bounce this morning is only a bounce.
Swing traders with a 3-4 week trade duration should wait for a capitulation low. Now that the market has broken key support on sustained selling, we are likely to see acceleration to the downside. After a 12 -year bull market, the bid was going to remain strong during the first phase of this topping process. Now we have reached a point where buyers are no longer worried about missing the next big bounce. They are much more passive and sellers have control. Short term swing traders can sell out of the money bearish call spreads on stocks that are just breaking below key technical support levels. Avoid stocks that have been pounded senseless since they are likely to see short covering rallies.
Day traders will have an opportunity to enter short positions this morning. The market will not have a meaningful rally until the downside has been tested. The best scenario this morning would be a wimpy bounce with mixed overlapping candles. That would give us precious time to find stocks with relative weakness (20%). Unfortunately, I don’t believe that the overnight bounce is going to last long. A gap reversal is possible and stacked red candles consecutively would be a sign to short aggressively if the candles have little to no overlap (20%). After a heavy round of selling yesterday, we are likely to see a gradual drift lower with mixed candles. This will be a sign that the downward trend strength is weak and that this will be a day of rest for the market (30%). Be patient. There is no reason to chase on either side. Wait for the price action to unfold and favor the short side.
Support is at the low from Monday and resistance is at the high from Monday. An “inside day” is likely.