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We saw a light bounce from oversold levels in the indexes. Now, the question is if we can see a follow-through day next week. This scenario is still in play despite the weak close on Friday. 

The stock market has been in a correction since August. The only time most stocks bounced in the past couple of months is when interest rates pulled back. The correlation is crystal clear. It is all about interest rates until the next earnings season starts which is in about 3-4 weeks.

It’s hard to trust any rally for too long unless rates start to really come down. The 10-year yield is in a notable uptrend, which is a major headwind for equities. This doesn’t mean that we can’t see short-term bounces in stocks. We saw one in late August. It lasted a couple of weeks and then cratered. We potentially saw the beginning of another last week. Let’s see how long it lasts. Those frequent changes in direction can make you dizzy. This is why I keep saying this is not the time to be aggressive on both the long or the short side but it also doesn’t mean that I am not taking advantage of select short-term trading opportunities. One has to be super nimble and operate with a scalpel in this environment. I rather operate with a mega tractor but now it is not the right time for it.

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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.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary, real-time market education, the Momentum 40 list of market leaders, and much more. See what subscribers say about my educational service.

Check out my free weekly email to get an idea of the content I share with members. How my ideas/alerts did.

I published a new trading book recently (2023). Check it out on Amazon.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.

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The tape has been choppy lately. Green days are followed by red days and vice versa. Most breakouts are fizzling quickly. If you are not nimble enough to sell on strength, you are stuck holding the bag. I don’t know if Friday’s selling was due to monthly option expiration but many stocks are looking vulnerable on multiple time frames. The odds are that most people are now bearish and the market tends to surprise the majority. Wednesday’s FOMC can bring extra volatility and lead to a change in direction. 

There is a Federal Reserve meeting next week. No one in their right mind expects the Fed to cut the rates given the recent uptick in inflation and jump in energy prices. The consensus is for no change. The second most popular opinion is for a 25bps rise. I also think no change is the most likely scenario. None of that really matters. What’s important is how the market will react. Lately, the market has been searching for direction as there has been more selling than buying under the surface. 

There’s a new sector rotation almost every week. The one constant recently has been the strength in the energy sector – not only oil & gas stocks but also uranium and coal. I wouldn’t chase them here. Most energy stocks are extended and currently don’t offer tight-risk entries. Financials also woke up last week. The vast majority of financials beat earnings estimates this quarter and went higher after their reports. Then August came and all pulled back. Now, they are starting to perk up again. I’ll be watching for setups.

The current tape is volatile, setups are sloppy. We have to take things one step at a time and adjust to whatever the market sends. There are still decent ideas popping up but one has to be quick to take gains. In a tape like this, it makes sense to trade less and with a smaller position size. This is not the time to be aggressive, either long or short.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary, real-time market education, the Momentum 40 list of market leaders, and much more. See what subscribers say about my educational service.

Check out my free weekly email to get an idea of the content I share with members. How my ideas/alerts did.

I published a new trading book recently (2023). Check it out on Amazon.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.