I have to admit, today’s move caught me a bit off guard. I was looking for some kind of dead cat bounce from oversold levels and a big washout once earnings began pouring in and traders returned from the July 4th holiday. The market awaits nobody! I mentioned to members last night that you can throw out the trading action on the day of the Fed. It’s in the day or two after the announcement that is most important as traders digest the words of the Fed and construct their trading strategies for the month ahead. Apparently, the consensus strategy was to sell, sell, sell!
Today was a defining move particularly for the Dow, which busted through the March lows which also happens to be support at the old all time highs. I know, I know.. here come the emails that say the Dow doesn’t matter. Yes, it’s not a good representative of the market, BUT it is a HEADLINE number. It’s the number that Joe Schmo sees when he comes home from work on the evening news, so it does matter. Hopefully Joe Schmo has heeded my advice this year to stay the heck out of this market or be fully hedged. Either way, you my friend are sitting darn purdy here.. flush with cash and ready to pounce when a new bull market emerges.
Ah but first things first. This is a big, bad bear market with not a bull in sight. Let’s take a look at the charts to get a sense of where we might be headed next… but before I do let me be very clear: this is no time to be a knife catcher nor a hero trying to pick a bottom. Before that can happen we need a spike in the volatility index (VIX) followed by massive capitulation. Here’s a look at the VIX which could hit resistance around 28 and market a bottom. You see it broke the up trend of 2007 following that March low, so could be settling down. Watch the VIX (potentially tomorrow) should it test what is now resistance of that up trend line around 28 – 30.
The Nasdaq could get a snap back rally after touching 2300, but ultimately it will need to come down and test those March lows, potentially carving out the 2nd leg down of a double bottom base.
Note the potential for a double bottom base in the S&P as well but remember that the 2nd leg down often undercuts the first leg down, shaking out the last of the weak holders. So, while 1250 – 1260 is strong support around the March lows, it may take a breach of that level to really drive the fear and get the VIX up in 30 range.
I didn’t annotate it out in the S&P and Naz but if you’re new to chart reading or believe the charts don’t matter I want you to take a look at the rise off the March bottom and run to that 50 day moving average in blue on all the indices. It’s absolutely no coincidence that the market failed at that point. Zero, zilch. Now think about all the "professionals" on CNBC or other entertainment (I mean news..) outlets that said the economy isn’t so bad and now is a great time to buy. If just one person reads this report tonight, begins to turn off Cramer and think for themselves based on simple chart analysis then I’m happy.
Please continue to be careful out there. My recommendation remains the same.. stay on the sidelines or fully hedged. Although fully hedged is becoming more of a risk down here, so moving more to cash is the best option right now. Good night and good trading.