We May Have Seen A Short-term Selling Climax – Here’s Why

January 19, 2022
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Posted 9:40 AM ET – Last night the S&P 500 dropped 50 points below the 100-day and bulls aggressively bought. The result was a bullish hammer and we are seeing follow through buying this morning before the open. This is the type of selling climax I was looking for and I believe that the 100-day MA will hold until the FOMC a week from now.

TLT (20-Year US Treasuries) broker major technical support level ($141). This will put downward pressure on tech stocks and small caps. Last September, most Fed officials did not expect a rate hike in 2022, and now most of them are predicting four rate hikes this year. That is a very hawkish swing in a very short time span.

Inflation is spiking and we have seen “hot” CPI/PPI readings. Hourly wages are also increasing (.6% in last jobs report) and that is the highest input cost for companies. With the Fed’s current policy real yields (interest rate less inflation) continue to fall further into negative territory. Asset Managers are selling bonds and they (not the Fed) are the ultimate pricing mechanism.

In the last 6 months, China has been on the radar. If it is the global growth engine, why is their stock market in bear territory (> 20% off of the high)? China’s GDP grew 4% and that was much lower than expected. Retail sales which typically show growth around 8-10% came in at a meager 1.7% in December (Y/Y). The PBOC cut interest rates 10 basis points for the first time since the pandemic peak in 2020. They see the warning signs.

Swing traders will get some relief today. I know there has been some hand wringing, but I told you support would hold. As the market bounces off of support the IVs will collapse and your bullish put spreads will be in great shape. I am expecting a nice rally today on the heels of the overnight action. I am NOT overly bullish and I would NOT suggest putting on new bullish put spreads. We want to be mainly in cash a week from now. By selling OTM bullish put spreads, we gave ourselves the breathing room we needed.

Day traders look to buy early. We could see stacked consecutive green candles with little to no overlap. If we see this the Buy Into Earnings search could be a beauty. Try to wait as long as you can. Typically we want to see these selling climaxes during the day, but with 24/7 trading, we need to respect the overnight price action. Our ideal set-up today is a pause and slight retracement on the open. That would suggest that gains are largely holding and that we can expect more upside. This pause on the open will give us valuable time to find relative strength. I will be focusing on the long side today. Asia was down and Europe was up so not much of a global influence on the open.

Support is 100-day MA. Resistance is at 50-day MA
.
.
image


Previous Bulletin

January 18, 2022

Next Bulletin

January 21, 2022
Top