This Is the Second Leg Lower We Were Looking For – Game Plan

January 10, 2022

Posted 9:45 AM ET – The FOMC Minutes were a splash of cold water last week and it was a reminder that the Fed is more hawkish. The average Fed official believes that there will be 3 rate hikes this year and many analysts are projecting 4 rate hikes. Bonds are reflecting that hawkish stance and key support at TLT $141.40 will be tested. The SPY is going to open below the low from last week and the second shoe is about to drop.

Inflation is putting upward pressure on bond yields. Last week hourly wages increased .6% and that is the largest input cost for companies. Wednesday the CPI will be released and traders are bracing for another “hot” reading. The initial shock from a rate hike is bearish. Asset Managers go into risk off mode on the notion that tightening might stifle economic growth.

Analysts were expecting 479K jobs last week and only 199K jobs were created. I do not trust the government’s numbers because they are impacted by holidays, adjustments and local offices reporting correctly. ADP processes payroll checks and they have no agenda. They know how many checks they cut and they reported 807K jobs in the private sector. I do have one component of the jobs report that I track. Hourly wages went up .6% and that is high. This is the largest input cost for companies and it is inflationary. For that reason I view the number as bearish for the market. US 20-Year Treasuries (TLT) is dropping and it is close to a major technical support level at $141. If that is breached it will provide a stiff headwind for the market.

Swing traders, should have 20-25% of your target bullish put spreads on. Find stocks with relative strength. If the last price is in the upper right hand corner of the daily chart, it could be a good candidate. Lean on those major technical support levels. Keep the majority of your powder dry for this next leg lower. If the SPY tests the 100-day MA, it won’t be there long. A bounce off of that support level is where you can add the rest of your bullish put spreads. We want a bullish hammer on a daily chart or a bullish engulfing candle after testing the 100-day MA on SPY. Buyers are typically engaged ahead of earnings season and it will start this week. I am expecting the 100-day MA to hold for at least a few weeks.

Day traders should watch the open. My favorite scenario would be a small bounce on the open that loses its momentum in 15 minutes. Tiny bodied candles will be a sign of resistance and 1OP will start the day with a bearish cross from a spike. Asset Managers are not going to rush in and buy this dip. They need more proof of support and I feel that we will see more selling pressure into the CPI. Long green candles stacked consecutively with little overlap on the open would be a sign of strength (10% chance). This is not likely because Asset Managers want to see firm support after the recent selling. Long red candles stacked early would be bearish and the SPY will open below the 50-day MA (30%). I do not like to chase moves so I would not aggressively trade this pattern. It would tell me that the selling pressure is heavy and that I will be spending my day looking for shorts and entering on bounces. The most likely scenario is a gradual drift lower with mixed overlapping candles (40%). This bull market will die hard and that support will be strong initially. If we see a downward sloping channel during the first two hours the selling pressure will accelerate and we will see a couple of very long red candles. This will mark support and it could take a few hours for that selling climax to surface. Be patient and wait for one or two windows to set up during the day.

We will not see a decent, sustained rally until a low is set and tested. Be patient.

Support is at the 100-day MA and resistance it at the 50-day MA.
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