Retest or Regret?

Navigator Algorithm – 100% Cash – Gamma Rising

Today is day four out from Monday’s spike low, and the retest is underway. Last night’s range was considerable once again. Day five is usually when an initial retest is complete – successful or not. We have a spike low candle on Monday and Tuesday, with a spike high candle reacting to yesterday’s Fed meeting.

Notably, each regular session candle has a higher low on the cash index, a subtle but positive clue that the market is trying to bottom here. To students of Elliott Wave (that rearview mirror trading strategy I am so fond of), it appears that we are in that 4th wave triangle morphing into the 5th before we have a solid low in place, at least for this first wave down.

But what if this is a bear market? If this were the 2007-2008 bear, where is our current location?

Let’s say that it is a bit sobering to locate ourselves in a 50% decline that would not end until March 2023. Of course, lightning never strikes twice, hopefully.

So what did the Fed say that was so disappointing yesterday? Nothing that I can detect. They said what you or I would say. I heard that they are sticking to the plan they had already laid out. No more bond purchases (QE) after March. Three rate hikes for the year are to begin in March. And they laid out some rules for reducing their balance sheet later this year.

The Q&A in the follow-up conference seemed to trip the market up. One could interpret Chairman Powell’s comments as allowing for more than the three rate hikes initially communicated. But I could also argue that his language allowed for fewer than three. The market puked until the Q&A ended.

Realistically, I heard Chairman Powell say that they will speed up or slow down their tightening policies based on the incoming data and forecast. He also said they would be as transparent as possible – no surprises. What else would anyone expect the Fed to do? Perhaps the market has just lost confidence in their “incoming data and forecast” or the Fed itself.

I am unsure what the market wanted to hear, and I suspect it would sell off anyway. It could not penetrate the five and 200-day lines from below yesterday – perhaps the best explanation of the reversal.

If the Fed was too dovish, the market would be worried about inflation. Too hawkish? The market worries about a recession. All I can say is that there typically is a retest, especially after a 10% decline. Until that clears, it is not safe to take an intermediate long position. It is arguably too late to short, so patience is a key now. We need a price pivot to clear the air.

What I did do last night was travel through several hundred key stocks, and most of them are on or approaching key support levels after respectable (though perhaps just the first phase) declines. For this and all the other reasons laid out in these pages, this leads me to believe that we will bounce out of here in the next few sessions.

The Weekly Expected Move and October low (4263.25 or so) provided support again in the overnight session. The S&P 500 didn’t reach Monday’s spike low as yet, and it may not. Some retests come in short of the initial low. Some run the stops below it. The market bounced out of the Asian malaise when Europe opened last night, and the futures market hasn’t looked back thus far this morning.

Notably, the Navigator Algo has switched from “Trend Reversal Imminent” to “Gamma Rising” as it potentially transitions into a buy signal.

Day Traders

Each low since Monday has been higher than the previous day’s low in the regular session. While we did not hold the critical bull/bear threshold by yesterday’s close, I would now use yesterday’s low as the key threshold for today’s session. If we break the pattern of higher lows, then getting more bearish is justified.

We will open inside yesterday’s range with overnight inventory that is relatively balanced. If any, there is little guidance on how to trade the open. However, I am well aware that there are still a lot of shorts out there that could easily panic and buy.

Target the top of the single prints at 4381 first and monitor for continuation on a long trade. Strong market internals can help confirm long trades. Remember that single prints tend to act like gaps where there is a void of price action. Mark the open, and favor longs above it as long as screens stay green and internals stay positive. Remember that closing above yesterday’s high at 4446.85 (also the 200-day line) is the key to a pivot.

Given the shift in monetary policy that pricked the market bubble, I need more than usual confirmation of a low and turn than I would look for in a normal market correction. It would be best if you did the same.

Remember that the market usually takes an initial direction and tests either the overnight high (4385) or the overnight low (4263.25) to find the path of least resistance. With the sizeable overnight range, the halfback at 4326 might also open the door to lower prices. If the market breaches yesterday’s low at 4294.25, target the Weekly Expected Move and overnight low at 4263.25. From there, target Monday’s spike low at 4212.75.

A.F. Thornton