As far as trading these markets, you certainly need to have a short attention span. Taking a contrarian approach at the extreme ends of this range has been the only thing that is working. These markets move fast, and there is a fine line between winning and losing. Tuesday’s push through failure in the S&P and many leading stocks was the first clue that the oversold bounce had run its course. Most experienced traders choose not to make bets in front of big economic announcements like the Fed, so you would have had to be quick on the trigger if you wanted to get short. Like we have seen over the last two months, the first big down day usually leads to a gap and further continuation the next.
Three of the sectors that we have highlighted for relative weakness in the Off the Charts newsletter over the past few weeks–Oil Service (OIH), Materials (XLB), and Financials (XLF)–all led the markets lower yesterday! These sectors were showing extreme relative weakness well before the Fed spoke, and sold off more aggressively in the last hour.aa
Although last week’s action put the bear flag pattern on hold, we still held within the range and the thesis is intact. It now appears likely that we break down from the channel, and many of these relatively weak ETFs are already doing so. During the head and shoulders formation that led to the breakdown around the time of the S&P-US debt downgrade, these same sectors broke below their necklines first, also.
S&P 500 important technical support levels are 1135-1140 (which we are opening right below so far this morning), then 1118-1122. A close below that second level would put the low of the year, 1101, firmly into play. If we close below that level at some point over the next few weeks, it would likely lead to the full measured move down to the 1010-1040 zone.
While we are still long-term bullish on our list of relatively strong stocks–especially Apple (AAPL) and Amazon.com (AMZN)–when momentum technical areas don’t hold, we sell and look for lower levels to buy them back. There will be another golden opportunity to buy stocks at some point likely later this year, but right now we are in a bearish leaning wait and see mode.
*DISCLOSURE: Scott Redler has no positions
