Daily Commentary: September 07, 2023

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This Is A Bearish Market Pattern

Posted by Peter Stolcers on September 07

We have a lower high double top and the SPY is back below key support at $445.

PRE-OPEN MARKET COMMENTS THURSDAY – You can interpret the headlines anyway you want. Good news is bad news or bad news is good news. The fact remains that buyers and sellers are engaged and we are seeing two-side price action. Regardless of which way we go, it is going to be a VERY bumpy ride. That makes for very tough trading conditions. Right now, sellers have the ball.

The market closed below a key support level at SPY $445 yesterday. This morning it is down over 30 S&P 500 points before the open.

EU Q2 GDP grew .5%. That is dismal growth and the Germany had a big drop in industrial production. The ECB could tighten next week and there have been hawkish comments overnight. China is posting weak economic data and it is trying to prop up activity with rate cuts and bailout money for property developers. Now they are banning government workers from using iPhones. The new Huawei chips are rumored to use US technology and a trade war is brewing. AAPL is down on the news and it gets 20% of its revenue from China.

If the major economies in the world are slowing, where is the growth going to come from? Studies have shown that the savings from Covid have been depleted in the US and credit levels (and interest expenses) are high. That is going to bite into consumer spending. The Fed has remained hawkish and they do not believe that core inflation can be tamed without a recession.     

All of this fundamental information has soured the mood during a period of seasonal weakness. Regardless if the concerns are legitimate or not, the price action is telling us to favor the short side.

The market broke key support in August and it tried to rally back above that level last week. That bounce was squashed this week and we have a lower high double top. This morning, we are seeing follow through selling and we are back below a key price level (SPY $445).

Gap and go formations are difficult to trade. Much of the move takes place on the open and it is difficult to separate which stocks are dropping because of the market decline and which ones legitimately have sellers. 1OP is at the end of a bullish cycle. Our best scenario is a wimpy bounce on the open that features mixed overlapping candles and light volume. That would set us up with a good entry point for shorts when we have the bearish 1OP cross. It will also give us time to find the best shorts. The heavy volume yesterday came on the drop and not the bounce. That tells us to favor the short side. Europe was pretty flat overnight, but Asia was down. This is not the worst backdrop and there is a good chance our scenario will play out. We did see some buying yesterday afternoon and this drop might interest some of those traders. If the market gradually drifts lower with mixed overlapping candles, it is going to be a bumpy ride and you should expect that. If the stock is breaking major support on heavy volume and it has been weak relative to the SPY for a week, it is going to be a good prospect. Try not to chase stocks that are “too far out of the gate”.

Support is at SPY $442.65. That is the open of the last long green candle. If that fails, we could test the Low+ trendline that starts back on March 24th. Resistance is the low from Wednesday.

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