Watch your Next Step in the Market - Weekend Market Overview

The Market can be a dangerous place, especially these days where the rally that started on mid-July gave the appearance that the Bear Market was over. If we take a look to the main indexes, half of them are back to Bear Market territory (a loss of 20% or more from the previous high). The ones that aren't officially there yet, aren't that far from the 20% loss mark. What's next now that the Market revealed some clues about the real force of the Bulls?

Market Overview

The New Highs and New Lows indicator (NH-NL) summarizes a lot of the current Market situation. The latest reading in the screenshot below (row 9,721) displays the overwhelming amount of selling pressure with very little demand. For that same row the Monthly values show the difference in power between Bulls and Bears in the fastest timeframe that I track. During a period of a month only 133 were able to make a new high, while 2,028 kept declining to a new low. If you are trading on the long side, good luck trying to profit if you aren't in one of those 133 stocks.

The current Market environment seems to be more conducive for day traders and swing traders. People or institutions that will keep their trades open for a few days at most, maybe a couple of weeks with the current volatility.

The Bears are still too strong for the Bulls, that can be clearly seen in the weekly S&P 500 chart below. The downtrend continues (lower highs and lower lows, highlighted with horizontal solid black lines) and a behavior seems to be forming in this timeframe. During the last two important rallies, the supply started to increase dramatically at the +1 Keltner Channel (KC), after that a pullback started that sent the index to oversold territory (-3 KC or below). When the index touched the -3 KC a new rally emerged, but the +1 KC seems to be acting as a resistance. In order to damage the structure of the downtrend we would need to see a rally that closed decisively above 4,300.

S&P 500, weekly chart, you can click on the image in order to magnify it

There's nothing incredibly interesting in the daily chart of the S&P 500. It's rejecting the prices around the -3 KC. That gives the possibility that we see at least a reaction rally next week. As I mentioned in previous articles, a reaction rally is just part of the natural Market oscillations, it doesn't necessarily mean that the Market is changing direction. Several things can trigger a reaction rally, traders covering their shorts, greedy traders trying to catch a bottom when they consider that a security is "cheap".

I always try to get a perspective based on the history of the index where I mentally have a few references that I track. One obvious reference is that back in Jan/2022 the S&P 500 was at 4,818. Last week it closed at 3,873 that's a loss of 945 points in nine months, it's clear that the Bears are still in control.

For the daily chart of the S&P 500 I have highlighted with horizontal dotted black lines the important references that I'll track in order to consider opening long positions. If the index is able to close above 4,200 first and then 4,300 that would be a signal of strength from the Bulls.

S&P 500, daily chart, you can click on the image in order to magnify it

Industries

For a third time in a row the strong Industries haven't changed, from the 68 Industries that compose the Global Classification Standard (GICS) there are only three that still seem to have some force on them. If the downtrend continues next week, it's very likely that there won't be any strong Industries posted in my next article.

The 'Consumer Staples' and Utilities Sectors are considered defensive. People is likely to continue paying their utilities bills and buying beverages despite the inflation or the economic slowdown. When the portfolios favor these kinds of Sectors it signals a very low risk appetite.

Eventually we will see a change where one or more Industries will start rallying even before the Market changes direction. Those Industries could lead the next powerful multi-month Bull Market.

Scenarios

Scenario #1: The S&P 500 is rejecting the oversold level in the daily chart (-3 KC or below). The most likely scenario from my point of view is that we will see a reaction rally. With the current demand a realistic target would be 4,150 and if there's a very positive and strong catalyst during next week, maybe 4,300. Until the underlying problems that are giving direction to the Market aren't solved (inflation/recession, Ukraine war, China tensions, supply chain crisis, etc.) I would just consider the movement as a reaction rally. In the unlikely case that it gets to 4,400 or above then I would need to evaluate what's fueling that amount of demand.

Scenario #2: Bears are in control, they could easily resume the decline next week or if there's a rally that is too weak they could kill it quickly. It's important to monitor the amount of supply through the Monthly NH-NL indicator. If the Bears manage to take the index below 3,700 fear is going to dominate again the Market.

Scenario #3: With the current volatility and strong catalyst that have been moving the Market I don't see very likely that we will see the index stall during the next trading week. If that happens it would mean that the Bulls weren't strong enough to make the Market rally, however the selling pressure was reduced enough to stop the decline. Without a rally, it wouldn't be that bad to see at least that the Market could start tracing a bottom.

Summary

The next trading week will be important to understand the balance of power between Bulls and Bears. The factor that keeps dominating the Market direction is the hawkish Fed trying to control the inflation. The Market has its own timing and right now it's closer to send all the indexes to Bear Market territory rather than thinking about the possibility of the beginning of a new and powerful Bull Market.

Unless I see an incredibly attractive setup I won't be opening new long positions during the next trading week. It still seems to be too early, however if there's a great setup and there's a rally with some descent force, a pilot trade could be a good way to get a better feeling of the Market situation. Strict risk management is the key in order not to have fatal losses that can blow up your trading account. If I end opening a pilot trade it will have a hard stop in place and I will trade it with a reduced size.