Be patient. This is a downward sloping trading channel and we need to see resistance.

PREOPEN MARKET COMMENTS THURSDAY – I often tell you that you don’t need to conduct fundamental analysis. Price is truth and all you need is technical analysis. Many people have a very hard time trusting it because they think it is some type of VooDoo Magic. Just because something happened before doesn’t mean it will happen again. The green and red rectangles are not random. They are displaying behavior and animals absolutely repeat their behaviors. When a deer is on a path that leads to a stream, there is a very high likelihood that it is going to stay on that path. Technical analysis (TA) helps us identify those paths.

Let’s start off with a little context before we get into TA. Initial jobless claims ticked up (217K) and retail sales were a touch light (.4%). The inflation numbers showed that it is easing. I believe we are well on our way to disinflation. Be careful what you ask for. I believe we are on the brink of seeing an economic slowdown and prices will continue to drop. That spans from commodities (due to China) and home prices in the US (massive inventory of new homes). Trumps inauguration next week will spark optimism, but I sense that it could be a “sell the news” event. It will take time for his policies to take effect and I see some strong headwinds in the meantime. Earnings season has started off well and financials had a nice rally.

There has been good economic news since the market dropped in December. What gives? I believe that the smart money is starting to reduce risk and that is why we are seeing lower highs. They see the writing on the wall. Bull markets die hard and dip buyers have been conditioned to buy. They have not been discouraged yet.

So let’s do a little TA this morning. I thought I would look back at a similar time when we saw this type of price action. Remember, it is reflecting behavior. There were a couple of “one off” drops that were steep and they rebounded quickly. They also did not have any drops before the move that might have indicated some selling pressure. These were just over-bought dips. I was looking for a pattern where we had a drop before a relative high and then some compressed price action. That drop needed to have a meager bounce and then I wanted to see a series of lower highs. That would be a sign that the selling pressure was persistent. The market also needed to spend time below the 50-day MA and AVWAPQ. Those are the first support levels. If I found that pattern, I wanted to see what happened next. That would allow me to predict future price movement.

I found that pattern in July of 2023. Then I started to think, “Hey, that was the start of earnings season.” This is the start of earnings season… interesting. I know that bonds have been selling off, I wonder what they were doing in July of 2023? They were dropping as well.

I still believe the market is going to probe deeper for support. This bounce needs to run its course and we need to see resistance just above the 50-day MA. If I see that, I will start taking some swing shorts on the notion that we are likely to test the 200-day MA. If this bounce shoots back to the all-time high, all bets are off and the odds of this pattern playing out are low.

Support is at AVWAPQ and resistance is at the 50-day MA.