The depth and speed of this drop suggests a fair amount of selling pressure. We have to wait for a selling climax. Here’s what I am watching.

PRE-OPEN MARKET COMMENTS FRIDAY – The market has been able to hold the losses from the long red candles. Typically on a big move lower, the market will rest the next day. Back-to-back sell-offs are fairly rare. When we get a day of rest, we watch to see how much of the long red candle is retraced. If it is entirely retraced, it is a sign that buyers are present. If the market can’t retrace that red candle at all, it is a sign that the selling pressure is heavy and that there will be follow through. Monday the market sold off hard and Tuesday we rested right at the low from Monday. That was a bearish sign and Wednesday the market staged another leg lower and it closed near its low of the day. Thursday we did see a little buying early in the day, but that was quickly squashed and the market closed on its low of the day. That was the first attempt at a bounce and it was easily rejected.

The S&P 500 was down big overnight and this was related to the Middle East. Wars do not have a lasting impact on the market and the futures bounced right back. The conflict is grabbing the headlines, but I feel there are other factors in play that have sparked selling. It could be that there are signs that economic growth is slowing, it could be China’s bubble or a dozen other things. We don’t really care what the reasons are, we just evaluate the degree of the selling pressure. This is a fair amount of selling and we need to respect it. I am still waiting for signs of support and I still intend to trade the bounce. The SPY is close to the 100-day MA and we are likely to test that level.

The gap down overnight was an over-reaction and that is why we bounced. At that level there were buyers and they defended the market. It’s rare to see a capitulation low in after hours trading and I believe that the market needs to probe for support during the normal session.

Gaps up have been easily smashed down. I would prefer to see a gap down with follow through in the first hour. Then I would like to see a relentless bounce that features stacked green candles. That will be a sign that the low is in and that buyers are interested.

There are opportunities to day trade from both sides. Until we see that low, remain flexible and go with trades that have nice momentum. It has been more difficult to find bullish trades. Look for stocks that have preserved their relative strength during this market decline and set upside alerts.

From a time perspective, I thought we might start to see signs of support right around now. We might still need a few more days and the 100-day MA could be in play.

Watch for the deep fast low and that massive relentless bounce that erases all of the losses quickly. That type of price action is where we take starter swing longs. On follow through we add progressively.

Support is at the 100-day MA and resistance is at the 50-day MA. $500 has been a “sticky” area so watch it as well.