When Fear Takes Over the Market

When the Markets closed last Friday Sept/23, the Dow Jones Industrial Average was the only important index that didn't officially close in Bear Market territory (a loss of 20% or more from the previous high). This situation will eventually create great opportunities for the people trading on the long side, however, what can we expect in the near future?

Market Overview

The amount of demand in the Market is minuscule compared to the overwhelming selling pressure. The fastest timeframe that I track is displayed in the Monthly columns (G, H and I) which suffered from a steady increase in the amount of New Monthly Lows. We can interpret the numbers from row 9,726 in a way in which from all the available stock in the Market that barchart.com tracks only 43 symbols were able to make a New High on Friday Sept/23 considering the last month as our timeframe. However, 3,666 symbols were able to make a New Monthly Low in the same period of time.

When the Bulls finally start to fight back, those columns of the Monthly New Highs - New Lows (NH-NL) are the ones that will start to move first. The amount of New Lows is pretty high in all the columns, not just the Monthly ones. This could trigger at least a reaction rally next week. A reaction rally isn't a change in the Market direction, it's just an upward movement that won't necessarily last. It can be triggered by several factors such as short covering or greedy traders trying to catch a "cheap" price.

Reviewing the weekly chart of the S&P 500 it's easy to see that the downtrend continues (lower highs and lower lows highlighted in the screenshot below with horizontal black solid lines). The pattern will continue strong if the Bears are able to take the index below 3,600 next week.

A recurring behavior seems to be developing in the weekly chart, two sharp declines, highlighted by the red dotted arrows, occurred when the index reached the +1 Keltner Channel (KC). It would seem that the demand isn't strong enough to go beyond that level. However, the Bears are strong enough to take the index to the -3 KC (this is an oversold level). Once that the index is at the oversold level, the Bulls take the control for a while and another rally emerges (green dotted arrows). The S&P 500 is getting close to the -3 weekly KC (green circle), let's see if the pattern repeats.

Reviewing the daily chart of the S&P 500 it's already at oversold levels (oversold levels are when the index is at -3 KC or below). That could trigger a reaction rally, with the weakness that the Bulls have displayed during the past month is unlikely that the rally, if there is one, will get past 4,050 (horizontal black dotted line). In the past we have seen that the index has had this kind of reaction rallies consistently when it gets to oversold level (green dotted arrows).

Industries

I keep reviewing the 68 Industries that compose the Global Classification Standard (GICS). This week there's only one Industry that I would consider still strong and it's in a defensive Sector, not really encouraging in terms or risk appetite.

It will be easy to notice when the situation starts to change, new Industries will eventually show up in the list and one or more of them could be the leaders of the next powerful Bull Market. That could happen in a week or a year, no one knows for sure, that's why I keep tracking them on weekly basis.

Scenarios

Scenario #1: Despite the Market sentiment dominated by fear I still think the most likely scenario is a rally, not a change in the Market direction, just a natural bounce from oversold levels with a realistic target of 4,050. It would be surprising if the index manages to go beyond that level, that would signal that the Bulls might be gaining some force. There's no evidence to believe that at this point, but even in a Bear Market like the one we are living there are always rallies and pullbacks. Those oscillations are part of the game, the Market never moves in a straight line.

Scenario #2: The second most likely scenario, from my point of view, is that the decline could continue. It will be critical to monitor the 3,600 level of the S&P 500. If the Bears manage to decisively close below that level, I'll start posting new supports that could manage to stop the decline. The factors fueling the decline aren't solved yet, the inflation continues. The Ukraine war, the tensions with China and the supply chain crisis are still far from being solved. Any of them or even a new factor could act as a negative Market catalyst.

Scenario #3: The scenario that I see as the least likely is that the main indexes will start to move sideways. Anything can happen in the Market, so we have to be ready even for the most unlikely scenarios, however we are at a extreme oversold level on the daily chart. With such a sharp decline I see more likely that the current situation triggers a rally or the Bears are just too powerful that the decline will continue.

Summary

The current situation where fear is taking over the Market sentiment and negative news keep dominating the media is something that can make us rush our decisions and damage our account. I have been promoting risk management during months, it's the most boring way to trade, but it can save people from blowing up trading accounts. The Bear Market isn't over, that's clear now, and there's a possibility that the Bears can take the Market even lower.

No one has consistently timed the bottom of a Bear Market, bottom fishing is something that can severely damage a trading account. Trying to average losses is also a deadly strategy where the Fear of Missing Out (FOMO) and the greed take the decisions instead of you. Sometimes waiting on the sidelines while the storm passes is the best thing you can do. Whatever decision you take in terms of trading, I sincerely hope that you have a proven plan that lets you navigate safely this tricky Market.

Not Market Related

Last Friday Sept/23 was my birthday number 43, as the CEO, author, graphical designer, editor, Chief Market Analyst, etc. of this blog I decided to say happy birthday to myself in here.