The waiting is over and now we know that sellers have the upper hand.

PRE-OPEN MARKET COMMENTS FRIDAY – This has been a news filled week with lots of moving parts. Mega cap tech reported earnings, the FOMC statement was released and we had major economic releases. Buyers and sellers have been battling it out and the intraday moves have been fantastic. We needed to wait until one side or the other prevailed.

The last leg of the rally came on light volume and the candle bodies were tiny. That told us that the level of conviction was not high and that the move was vulnerable. That in and of itself is NOT a reason to short. I’ve seen light volume rallies that have lasted for years. We saw some profit taking the last two weeks and we knew based on the uptrend this year that buyers would try to buy this dip. The height and duration of the bounce would tell us if the market had any gas left in the tank. All of the news this week would play a role in how aggressively the market would be bought or sold. A nice strong bounce that easily challenged the all-time high would be bullish and a wimpy bounce that was easily smacked down would be a sign of aggressive selling pressure.

Wednesday, the market rallied above AVWAPQ and it filled a D1 gap from 7/24/24. The bounce was starting and yesterday the market tried to add to those gains early in the day. After 30 minutes of trading the bid dried up and sellers took over. The selling pressure spanned the entire session and the bearish trend day resulted in a long bearish engulfing candle. THIS IS THE SIGN WE HAVE BEEN WAITING FOR. The bounce only lasted one day and we can favor the short side on a day and swing basis.

There were some signs of weakness the last few days. Mega cap tech stocks did not rally after reporting earnings. TSLA, GOOG, MSFT, AMZN and AAPL had negative reactions. If the market is going to challenge the all-time high, tech stocks need to lead the charge. The Fed did not give any indication that they were going to cut rates in September and Fed Fund futures are pricing in a quarter point ease. This morning we learned that 114K new jobs were created in July and this is well below expectations (176K). ADP came in light this week (122K) and weekly initial jobless claims hit their highest level of the year (249K). ISM manufacturing was also week (46.8). Yesterday we also saw the VIX climbing even when the market was up and that was an early warning sign. It closed on its high of the day.

Before you hit the panic button, the world is not going to end. The earnings were good, it’s just that valuations are stretched and we will see some profit taking. The Fed is in the “sweet spot” and they can and will ease if they feel that the economy is softening. Economic growth has not plummeted. Q2 GDP growth came in at 2.8% and that is a healthy pace.

We are heading into a seasonally weak period of the year and the news is going to dry up. DC and the Fed will go into recess and no one is minding the shop. Asset Managers will worry that the Fed might not cut rates in September. Earnings season will wind down and the bitter taste from the negative earnings reactions will linger. Soft economic data points are likely in August and they have been trending that way. The election looked more certain a few weeks ago and now the polls have shifted. Traders will take vacations before the kids go back to school and the volume will be light.

Prepare for a normal market correction that lasts from August to the election. Any bounce from this point on will present a shorting opportunity for swing traders. You can sell out of the money call spreads on stocks that have high option IVs (> .35) and you can buy longer term in the money puts that expire in a few months on stocks that have low option IVs (< .35). Know that bearish markets tend to make big fast moves lower. If you are long option premium, you have to take gains during those deep drops. Option IVs will spike and you will be nicely rewarded for getting out early. Once support is established, we will get big snap back bounces. When that bounce stalls, your next shorting opportunity will present itself. Reference the chart from August – October 2023. That is the type of price action we can expect.

Day traders should wait. We had massive selling Thursday and a big drop before the open. The negative reaction to the jobs report has been erased. No question the backdrop is bearish. Our best case scenario is a wimpy bounce that quickly hits resistance. The “bad news is good news” crowd will try to support the market. Once that buying is exhausted, we will probe for support. Watch the mega cap tech stocks and watch VXX. If tech stocks can’t rally and if VXX is inching higher, that is a bearish sign.

The SPY is below AVWAPQ, the 50-day MA and a major D1 trendline. Support is the 100-day MA and resistance is the close from Thursday.