Watch This Technical Support Level

If we break below SPY $390 we will test the low of the year.

PRE-OPEN MARKET COMMENTS WEDNESDAY – The massive decline yesterday put the SPY within striking distance of an upward sloping trendline and horizontal support at $390. That is a critical level to watch. The CPI came in hotter than expected and we are not seeing much of a bounce this morning after a relatively mild PPI. Support at $390 was defended last week. If it fails we are likely to test the low of the year and there will be plenty of nervous jitters ahead of the Fed rate hike next week.

I suspect that traders felt that surprise favored the upside before the CPI was released. Energy prices have been declining and that should have tamed that component of the CPI. The reaction to the CPI has also been fairly muted even when it has come in “hot” in recent months. When the number was much higher than expected, they were blindsided. As they unwound their bullish bets the selling pressure increased. This is just speculation on my part, but it would explain the violent reaction.

The forces on both fronts (bullish and bearish) are formidable. The SPY is forming a giant wedge on a daily chart and right now we are within striking distance of major support at $390. The upper end of this wedge is at $425.   

The action is brisk and that should continue. Will central bank tightening result in a credit crisis? That is the primary question on my mind. Tightening will eventually lead to a recession and the Fed has stated that this is likely. Their top priority is taming inflation and this is a posture we have not seen in decades. Typically, when the economy has a sniffle, the Fed is breaks out the Kleenex.

The PPI fell .1% and the market did not have much of a reaction. Mortgage demand is down 29% in the last year and rising interest rates are having an impact.

The market is all over the board and I am not swing trading until the market breaks out of this wedge formation.  The intraday ranges are wide and trading volume is returning. I just can’t justify the overnight risk.

This is a great environment for day trading. We will not see a rally of any significance until we test the downside today.  The overnight gap disappeared, but the market has been able to find support near the prior day close. 1OP M5 will start on a massive spike. Our best set up would be a continuation of this bullish cycle with a wimpy short covering bounce. Look for mixed candles and overlap. If the bounce stalls we could get a nice shorting opportunity on a bearish 1OP cross. After a massive move like the one from Tuesday, we typically have a day of rest and both sides are tested. I suspect that we are going to test SPY $390 this week. It probably won’t happen today, but that is the level to watch. 1OP M30 and H1 are both on bearish divergences and that tells us to favor the short side.

Support is at SPY $390 and resistance is at $397.60.