The Selling Pressure Is Building – These Are the Warning Signs

May 19, 2022

Posted 9:30 AM ET – Yesterday was one of the weakest days we have seen in the last two years. The selling pressure is building as the Fed prepares to raise interest rates. Inflation is running hot globally and China’s economic growth is decelerating. The market still has plenty of work to do on the downside and the S&P 500 is down 40 points before the open.

Wars, inflation, recessions and viruses can all be resolved in time. Credit is the one issue that can lead to sustained market declines. High yield bonds (junk) are retreating and that is an early sign that we need to tread cautiously and keep our eyes open.

After a 12-year market rally the market bid remains strong and investors are conditioned to “buy dips”. This battleship is hard to turn. As the selling pressure builds, that temptation to buy dips subsides. That means the market bounces are shorter in duration and shallower in amplitude. Buyers start to realize that they will have an opportunity to buy stocks at a lower price and sellers realize that they need to be more aggressive if they are going to reduce risk. Eventually, the bid crumbles and the market hits an “air pocket”. We need to see that deep low. I don’t know where that support level is, but I can tell you that it is lower than most people think. We have not had the interest rate hikes and we have not seen the economic impact they will have. That will take a few months to play out. When we do hit that low it will be a gut wrenching experience like we saw in 2020. The bounce will also be furious like we saw in 2020.

I have advised longer term swing traders to be in cash. The violent snap back rallies have made it almost impossible to swing trade for more than an overnight. Be patient. Our time will come and it will be a great opportunity (provided credit issues do not surface). There is a mountain of cash on the sidelines.

Day traders should expect to see more downside today. Ideally we get an early bounce after a heavy round of selling yesterday. That will give us time to find relative weakness and to enter shorts at a good level. If you see consecutive long red candles with little overlap in the first 30 minutes, you will have to be fairly aggressive entering shorts. As I mentioned above, the selling pressure will start to build and you will not have to worry as much about massive short covering rallies.

Support is at SPY $350. I say that jokingly… why not. We have broken all major support levels. There is no reason to try and pick a target. Just follow the price action and 1OP. Resistance is at the low from Wed and the high from Wed.
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