Trade Alert: Stocks To Drop Again

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It doesn’t take much more than daily one-thousand-point swings in the Dow to send a clear message to traders that they best have a phenomenal trading system to depend on in which to make the most of a highly uncertain trading landscape. Bond yields traded above 3.05%, the highest level seen since November 2018. It is a real disappointment for the bulls to see such a strong effort to regain investor sentiment only to have cold water poured on their short-term spike. 

Grant it much of the rally was likely short-covering and program trading related buying, but clearly, Thursday’s sell-off validated the notion that selling into strength remains the pattern of choice until data on inflation shows a definite flattening out to where the Fed can curtail what looks to be two more half-point rate hikes. 

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As for the stock market, the month of May is hardly delivering the bullish flowers following the April showers. This week’s post-FOMC massive rally followed by an even bigger Thursday sell-off sent a very stark message to traders that the Fed remains squarely behind the curve. 

The bond vigilantes made this known after showing little conviction one way or another after the Fed raise the Fed Funds rate by 50 basis points, a measure most widely expected by the Street. But this measure came shy of what Wall Street really wanted, a 75-basis point hike to help narrow the gap between hyperinflation and where the credit markets are trading. 

Poor economic data was to blame for the sharp reversal lower. It was reported that quarter-over-quarter productivity fell by -7.5% indicating rising wages and falling output that are a direct threat to corporate profit margins. It was one of the worst productivity reports on record going back to 1947 that incited the broad selling pressure that left almost nowhere to hide other than being short the market. 


Traders should not be fooled by violent bear market rallies, such as what we saw on Thursday. Investor sentiment hasn’t been this bearish since March 2009 during what was a complete set of different circumstances. Back then the Fed opened the spigot of fiscal stimulus and the market rebounded. This time around, the market is correcting while the Fed is set to raise short-term rates for the next three months.

As of Thursday’s close, the $SPY closed lower 3.5%, at $413, below the 50 DMA and the 200 DMA. The value/reflationary ($VTV) closed lower 2.1%, at $142, right at the 50 DMA. The technology sector ($QQQ) closed lower 5.0%%, at $313, below the 50 DMA and the 200 DMA.

The $DXY closed higher, near the $103.6 level, approaching the March 2020 high. The $TLT closed lower by 2.7%, at $115, and below the July 2019 lows. The ten-year yield closed higher at 3.06%. The $VIX closed higher, at the lower 30 levels, above the historical average. 

The $SPY short-term support level is at $420 followed by $410. The SPY overhead resistance is at $435 and then $441.     

The market correction started earlier than I anticipated. At this point, it is just a matter of time for the $SPY to break below the February lows.   

I would be a seller of any rallies in the market and have a BEARISH portfolio at this time.    

I do not expect the $SPY to post new all-time highs in the first half of this year.  There is a high probability that the $SPY main long-term support at $415 will not hold in the next 2-6 weeks.    

"BUY" signal based on the Aggressive Power Trader Portfolio for tomorrow is at the $416 level using SPY and the "SELL" signal is at $430 for short-term traders.   

If you are trading options consider selling premium with July and August expiration dates. 

Based on our models, the market (SPY) will trade in the range between $415 and $470 for the next 2-4 weeks.    


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