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I think it’s probably only a matter of time before you start seeing the market fall again.
The S&P 500 gapped lower to kick off the trading session on Wednesday but turned around as Wall Street started its narrative-building machine after a higher than anticipated inflation number was printed. By doing so, the market is likely to continue to see a lot of volatility, but quite frankly I think it’s probably only a matter of time before we see this market break down even further. A short-term rally does make a certain amount of sense considering how slow it has been as of late, but Wall Street is full of it most of the time, and quite often what we will see is a reaction to an announcement that makes no sense, followed by the adults coming back into the room and pushing the market in the sensible direction.
There is probably a certain amount of interest in trying to pump the market in the short term due to earnings season coming, but earning season will probably only come into play for a very short amount of time before macro causes issues yet again. I think at this point you need to be aware of the fact that the down trending channel is still very much intact and the overall attitude continues to be one of negativity. The 50-day EMA is sitting just above the channel, so I think it makes quite a bit of sense that the 4000 level now is essentially the “ceiling in the market.” With that in mind, I am fading any rally that shows the slightest hints of exhaustion.
The 3750 level is an area that had been supported quite fiercely over the last couple of weeks, so breaking down below that then opens up the possibility of even deeper losses, perhaps down to the 3650 level. If we do rally from here, it’s really not until we break above the 4200 level that you could consider the trend changed, because at that point in time you would have broken enough structure in the opposite direction that a lot of short covering would have to follow. With this being the case, I think it’s probably only a matter of time before you start seeing the market fall again. That doesn’t necessarily mean that you short right away, but much like a currency trader, you will be looking for “value” on the downside.
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