While the Weekly Expected Move lows are drawing in price again this morning, it is only after we seemingly lost the intermediate trend at yesterday’s close. The Russell Small Cap index violated its one-year trading range. Trading ranges tend to double when violated, which would be unpleasant for this sector. The one-year trading range now looks like a major market top rather than a consolidation to go higher. A bear market for small company stocks (greater than a 20% decline) is now on the table.
The damage does not stop there as the NASDAQ 100, the Covid ERA’s darling and the FAANG stocks’ home base, broke its intermediate uptrend. The NASDAQ 100 correction now exceeds the 10% threshold, and the NASDAQ 100 is on its 200-day line. As well, this implies that the large-cap stocks are now joining the broad market decline which started late last year. In other words, the generals are now retreating with the soldiers.
So that leaves our core index, the S&P 500, still in the vicinity of its intermediate trendline. The WEM low is drawing the index back up this morning after losing the battle at yesterday’s close. But it is hard to argue that this index won’t follow its cousins lower as well, perhaps with some fireworks into next Wednesday’s Fed announcement.
The Founders Group barely booked break-even stops on its nibble positions yesterday before the market rolled over at the close, and we were flat stopped again. So we have nothing to show for our brief forrays at support last Friday or yesterday. The market didn’t punish us either for trying.
We remain 100% in cash with no gains (or losses) for the year thus far. Had I not been battling Covid when the year started, I would have been short from the December highs. Unfortunately, both the Covid and medicine made it difficult to think and process complex information.
It is a bit surprising that the intermediate trend is not holding. Yesterday’s treasury auction went well. There was a lot of demand which helped cap the 10-year rate at least temporarily, though it is at a two-year high. One has to conclude that uncertainty around next Wednesday’s Fed announcement has a lot of money sidelined.
So while we are in the zone for a low on the nominal 20-week cycle, lately averaging about 16 weeks, it would appear that the low will come in (likely with some fireworks) next Wednesday with the Fed announcement. That is our best guess for now.
Day traders should initially focus on spike rules this morning, with the top of the closing spike at 4549. Trading above the spike starts to negate the lower prices of the spike. Trading below or within the spike is more bearish as it confirms yesterday’s closing prices with value (time + price). Remember that the top of the spike and the Weekly Expected Move low is approximately the same price – 4549 to 4550.
Note that the POC and Settlement are at the same level today at about 4525. This becomes a good bear target for the day if yesterday’s closing spike is confirmed. As with all POC’s they tend to act as magnets. Target this level on bearish trades that have accompanying context.
With yesterday’s value area (where 70% of volume occurred) so large, it isn’t easy to point out any potential inflection points above. Be aware that rallying up through a lengthy value area is harder than rallying through normal value ranges.
The Weekly Expected Move low at 4550 will continue to act as a magnet through tomorrow’s weekly/monthly expiration at the close. After that, the trend is either broken or not. If broken, the S&P 500 has quite a bit of downside to joining its brethren. The 4550 level will be the halfway point to the ultimate low – if typical projections apply. Shorts then become more plausible to the projected pivot point.
I wish there were better news, but it is what it is.
A.F. Thornton