Morning Notes – 6/23/2022

Good Morning:

• Whether or not we are in a bear market boils down to one question: Is the Fed friendly or not? We know the answer. 
• All we can try to determine is whether the market is washed out enough in the short term to give us a short-covering rally. By most measures, it is – virtually on par with the March 2020 Covid Crash lows.
• We can also determine that there can be a bullish bias going into the end of the calendar quarter a week from today—more on this below.
• And that has put us back into another 200-point balance range between 3642 and 3843 on the S&P 500 futures contract. Balance Rules apply to the range. In other words, a breakup puts a target of 4042 in reach, and a breakdown brings 3442 into view.
• The market probed the range in both directions yesterday, closing in the middle. The overnight range is in the middle of yesterday’s range, but the market has steadily increased since Europe opened. 
• The market may open in the top third of yesterday’s range this morning with an orthodox gap higher. Though not a True Gap, you may still use some Gap Rule principles to guide you. 
• Most important is how the market handles the morning Gap if it materializes. Does it fill right away (negative), or does the market move away from the Gap with impunity (positive)? The Gap serves as an initial sentiment indicator.
• Fed Chairman Powell’s congressional testimony yesterday and today likely has a lot of money sidelined until his testimony is over.
• The bottom line is that we should treat rallies into June 30th options expiration as “short covering” and subject to failure.
• The best case is “positive drift” into expiration – perhaps allowing us to break the upper end of the balance range and move higher. I give slightly better odds to a breakup than a breakdown.
• In that case, I would use 4000 as the short-term goal, with 3600 as significant downside support into June 30th. Remember that the June 30th expiration removes important put positions and may expose the market to further downside into July.
• Getting a bit more granular, and focusing on the downside, recall that the market broke out from the pre-Covid Crash highs at roughly 3400. So carry that number forward in your narrative as well.
• Also, carry the following numbers forward related to the retracement of the Covid rally and extension of the January to February decline; (i) the .382 Fib retracement at 3550, (ii) the 1.618 Fib extension at 3435, and (ii) the .50 Fib Retracement at 3235.
• Recall that our intital target for this down leg was 3500, and our ultimate target for this bear market low is 2500 (and rising with time).
• For now, use the balance range and Balance Rules to project targets. Spike low support below us is in the 3400 range.

A.F. Thornton