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I think this is a situation where you are going to fade the rally until we get a huge move to the upside.
- The S&P 500 recovered even further on Friday, as the jobs number came and went.
- We are trying to trade within this downtrend, and of course, it is a down-trending channel.
- The top of the channel coincides nicely with the 50-day EMA, which is just below the 4000 level.
- A lot of this coincides quite nicely with a potential selling opportunity, but we did not get the exhaustion that I was hoping to see.
Breaking down below the bottom of the candlestick on Friday could be the first clue that we are getting ready to fall again, perhaps trying to get back down to the 3800 level. It’s also worth noting that the 3750 level offered a significant amount of support previously, and I think that is a nice target if we break down. If we were to break through there, then it’s likely that the market will go much lower, perhaps continuing to make fresh, new lows. The 3700 level is an area of interest as well, which would be hit along the way.
If we were to break out to the upside, it’s not until we get above the 4000 level that I start to take a rally seriously. If we were to break above there, then the next target is the 4200 level. A break above there then changes the entire trend, as we flip to the outside. At that point, becomes more “buy-and-hold”, but I think this is a dream at this point, despite the fact that it has been so bullish as of late.
Inflation Impact
Wall Street is pretty good at coming up with narratives, and the latest narrative is that perhaps inflation is slowing down, and it’s likely that the Fed could start cutting rates again at the beginning of next year. One thing I’ve noticed over the last 13 years is that eventually the Federal Reserve does what Wall Street tells them to, but we are nowhere near that at the moment. It’s also worth noting that as long as inflation continues to rip higher, we will probably continue to see more downward pressure than anything else. With that being the case, I think this is a situation where you are going to fade the rally until we get a huge move to the upside.
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