Since last Thursday I have been warning you to reduce risk. We didn’t know which way the market would break, now we do.

PRE-OPEN MARKET COMMENTS – WEDNESDAY – Last week the stage was set for a nice upside breakout. The market had been compressing near the all-time high and a strong jobs report could potentially fuel the move. Thursday the market gapped up to the all-time high. It treaded water for the first few hours and then the bottom fell out. The selling pressure was VERY heavy and it got my attention. A move of that nature signaled heavy selling pressure. The market closed on the low of the day and the range was 200% of the 20-day ATR. This resulted in a giant bearish engulfing candle on the D1 chart and I have been sounding the alarm ever since.

I was looking for an upside breakout last week into earnings season and we were preparing to buy that breakout. Our plans changed the moment we saw that price action. It was time to trim our bullish bias and to get more neutral. For those who were over-extended on the long side, I urged you to reduce risk on the bounce Friday. Many of the stronger stocks recovered the entire move and you had your chance. I hope you took it.

The drop yesterday morning was another warning. We saw stacked red candles early in the day. If buyers were aggressive, we would not have seen a move like that. The market did recover, but it was apparent that the selling pressure was building.

The Fed has been worried about inflation and they were vocal about it last week. It has been persistant and they are NOT going to cut any time soon. That placed greater importance on this morning’s CPI. It came in hotter than expected at .4% (.3% expected). The S&P 500 is down 90 points on the news and it is below the low from last Thursday. Inflation is going to get the entire blame for the drop today, but it is only one part of the puzzle. The selling pressure was present last week and the jobs report was excellent.

I urge you not to play Jr. Analyst. We don’t care why institutions are selling, only that they are. Valuations are stretched, sentiment has been bullish, inflation is stubborn, higher for longer could weigh on growth, energy prices are moving higher, China is struggling…. All of these factors play a role and they don’t matter… until they do. Just watch the price action. Last Thursday was not a fluke and I explained how I knew that. This was not program driven. You would never see a move of that size on that level of volume if it was just program trading.

I believe we will see some selling pressure the rest of the week. Bull markets die hard and we will get a small bounce into tech earnings. If the market struggles to make a new all-time high (likely), that will form a double top. Then we are likely to see some selling pressure this summer. If this plays out, we are not likely to see a new high until after the election. That is projecting out farther than I would like, but this is a very possible scenario.

As far as the price action today, this is a substantial drop. Any bounce will present a shorting opportunity. If we get one, be patient and watch for resistance. A more likely scenario is a “gap and go” with a drift lower that establishes the low of the day after 90 minutes of trading. Then we compress the rest of the day. Bullish specs are going to get trapped here and that will keep a lid on the bounce.

SPY $512.76 is the level to watch. Support is at the 50-day MA and resistance is at AVWAPQ.