Here’s the pattern to watch for.

PRE-OPEN MARKET COMMENTS FRIDAY – In the last month we’ve been expecting a dip. The depth and speed of that move provided us with important clues.

Here’s what we learned – Sellers are aggressive. The market dropped over 10% in three weeks. This was not a wimpy drop, there was “blood in the streets”. We blew through technical support levels with ease. That would never have happened if buyers were aggressive. Any selling pressure would have instantly been gobbled up before it even got started. Since the move down happened quickly, Asset Managers did not get a chance to reduce risk. They were not going to hit the panic button and sell into giant gaps down. They will wait for a better opportunity to sell.

Here’s what we know about bearish trend reversals – Bulls have been conditioned to “buy the dip”. That strategy has worked since November and we have not had many deep pullbacks. That is a sign of strength and they will buy the recent dip. This drop was fast and furious and the market got a little over-extended. We can expect a bounce. From a bearish perspective, we want it to be brief and shallow with mixed overlapping candles and lots of retracement. That would be a sign that some sellers are anxious to unload stocks at this level. During the bounce, dip buyers will temporarily have the upper hand, but that will change. As the market drifts higher, more sellers will be interested in reducing risk. Eventually the bounce will stall and then we will have a good entry point for shorting.

How high might we bounce? The trend that started in November has been strong so there’s a likelihood that the bounce will be decent. Those buyers need to be discouraged and bull markets die hard. That said, the technical damage they witnessed in the last month will temper their excitement. I believe the market could rally back to the 50-day MA. That is also AVWAPQ for SPY. If the market struggles to get through the 100-day MA next week, I would view that as more bearish. It is a sign that Asset Managers are not waiting. They want to reduce risk now and they don’t believe that the market will get back to the 50-day MA.

Recap – We’ve been long since November and the rally was strong. In June we started to head to the sidelines with swing longs. The quality of the last leg of the rally was poor. The rally was concentrated to mega cap tech stocks. The “dogs were barking” and we saw laggards bounce. That is typical near the end of a rally. We had to wait for a dip. The depth and speed of the drop would help us gauge the selling pressure. It was deep and swift. That is bearish and it tells us the next big move is lower. THIS IS THE PIECE OF INFORMATION IS WHAT WE HAVE BEEN WAITING FOR. If the bounce is brief and shallow (resistance at 100-day MA), it is a sign that sellers are aggressive. If the move gains a little traction (50-day MA), it is a sign that they have a little more gas in the tank and that sellers are not as aggressive. Make no mistake, the bounce is NOT bullish. We are simply trying to gauge how bearish we should be. Those who swing from the long side here and overstay their welcome are going to regret “getting cute”. Keep your eye on the ball and watch for an entry point for bearish swing trades.

Next Week’s News – The market has been leaning into a decline in inflation. The news has been good and the trend has been lower. Traders are not that concerned about it because it is down to the Fed’s target rate and this should give them breathing room to cut interest rates in September. This is especially true after a soft jobs report a week ago. I believe this sets up a potential surprise. China’s CPI came in much hotter than expected this morning (.5% vs .3% expected). If PPI and CPI come in a little hot next week it could through a wrench into the notion that the Fed will cut rates in September. Does this mean that I would load up on puts ahead of the releases? No. It means that I would not be carrying a lot of bullish overnight longs on the notion that the market bounce is going to continue higher. Apart from the inflation numbers, the releases will be fairly light. Retail sales next Thursday will impact the outlook for retailers and they will be reporting next week (WMT 8/15).

How should I swing trade all of this? I have a few longer-term starter shorts on and I am waiting to enter more of them. When this bounce stalls I will add. That resistance could form next week, but I will be taking time off so I will not be adding then. Ideally, we get a nice wimpy drift up to the 50-day MA next week that hits resistance. When I return, the table will be set.

What if I’m wrong and the market rebounds sharply? Then I will take losses on my starter swing shorts. It would take a monster move for that to happen and it is very unlikely. The selling pressure the last few weeks tells me that a move lower is coming. I just have to wait for a good entry.

How would I be day trading? This has been a great time to day trade. You can stay flexible and the intraday moves are enormous. You don’t need to take a lot of overnight risk right now. The moves in each direction have been sustained. When they stall, watch for signs of a reversal. Don’t get married to one side. Use caution if you see off-setting long mixed candles. That is a sign that most of the action is program driven particularly if it comes on light volume.

Support is at the 200-day MA and the 100-day MA is a pivot point. Resistance is at the 50-day MA.

That is your roadmap for next week.

Trade well, see you in a week.