Momentum Monday – More Selling. What’s Next?

MarketSmith powers the charts in this video.

September is seasonally weak but the real reason behind market weakness lately is the market waking up to the reality. The selling accelerated after the FOMC meeting this week. The Fed didn’t say anything new. The market finally realized that the Fed is not bluffing about keeping rates above 5% in 2024 to fight inflation. This is what caused the selling in stocks and the breakout in rates. The Fed has no reason to cut rates before inflation gets to a 2% handle for multiple months, unemployment spikes, or the indexes have a substantial correction. 

The S&P 500’s YTD VWAP and 200-day moving average are both around 420. This is also the level from which SPY started its big summer rally back in late May. It’s a big level and I wouldn’t be surprised if it gets tested soon.

After last week’s selling, sentiment is overly bearish. People are even talking about meltdowns and the 1987 scenario. Such a view is contrarian most of the time, but one has to be open to all scenarios. The market tends to surprise the consensus opinion. If you are short, you better be nimble and take profits often and quickly. The same concept applies if you want to get long in this tape. It is still not an environment where one should be overly exposed or aggressive in any direction. Being tactical, using small position sizing, and keeping drawdowns small will lay down the foundations for much faster account growth during trending tapes.

Keep in mind that nothing goes straight down. Even if the current correction accelerates, there will be violent bounces along the way. This is why I say don’t short in the hole – chase extended names. Obvious breakdowns are likely to shake you out before any further downside. Wait for a bounce near a declining moving average. This doesn’t improve our odds of success but at least we can enter with a tighter stop and get better risk to reward which can give us an edge.

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