In my newsletter on Support & Resistance I noted 4,300 is a key level on the S&P 500 and any interaction with that level will be violent — meaning a hard bounce or a collapse.

Today we closed right at that key level, meaning the market is at a major inflection point.

Why the market technically bearish.

Not only are we in “correction” mode of 10%+ off the highs, but many traders have been waiting for the bounce at 4,300. We saw a measly one yesterday early on, only to collapse into the end of the day. Today, we saw another small bounce off of 4,300, only to collapse hard again - an intraday reversal. Both fake bounces are called “dead cat bounces” or “bull traps”. This is basically the “nail in the coffin” for bulls. Bears see that and know bulls are scared, and bulls see it and know bears are about to pounce… and so everyone acts on it and sells. Price, once again, manifests itself.

Then again, anything could happen.

There’s always some news story…

I can’t tell you how many times I’ve seen a technical trade set-up, only to manifest with a major news headline. It’s as if the collective mind of the market knows something is going to happen before it does. Then, all of a sudden, a news event justifies the technicals. It sounds crazy, but if you pay close enough attention to the markets, you’ll start to notice it (and perhaps be creeped out a bit — me? I luv it).

One more thing on the news. Given the headwinds coming out of Europe, the bias remains to the downside (as I write this, the headline is that Russia just invaded and attacked Ukraine and futures are down more than 1%). The news of Russia invading Ukraine, however, has been priced into the market, perhaps too much.

Sell the Rumor, Buy the News

More on the news. Markets are very oversold right now, as Russia and a Fed Rate Hike have been the news to sell on. Just look how far outside the Lower Bollinger price is on the daily chart…

…and the weekly chart.

Beginners Warning: Beware the Bollinger Slide

Do not take closes outside of the Lower Bollinger lightly, as it may be the beginning of “walking the bands” or a Bollinger slide. When price hugs and walks the upper or lower Bollinger Bands, it could signal a very strong move in that direction:

Learn more about how Bollinger can help you buy the dip here.

In bull markets, price walks the upper Bollinger band, and in bear markets, price “slides” down the lower Bollinger band. Just look at the January price action… every close outside of Bollinger saw lower prices, until our Hammer Candlestick formed on January 24th.

We are in a real bear market, and trade it I will. I am watching for a candlestick reversal like a hawk.

Sell the Rumor, Buy the News

Markets are a future pricing mechanism. That means when the bad news actually comes out, it may be time to buy. Not to mention, save for a catastrophe like Covid-19, nothing in markets is linear. Price does not go straight-up, nor straight down. And if it does, it often reverses hard. Also don’t forget, price always ends up right back at its historical average.

Raise some cash, a short-term bottom is near, but the put/call ratio out of the Chicago Board of Exchange*, and the NYSE Advance/Decline* line signal lower prices for now.

Happy trading 😊

*These are very complex topics I am still trying to figure out how to synthesize in a newsletter for the beginner’s mind. Just understand that the Put/Call Ratio and the NYSE Advancing Stocks vs. Declining Stocks gives us a really good sentiment read on the market… how people are feeling… the collective feelings of everyone. What these indicators are telling me now is that fear and pessimism haven’t peaked yet, but soon will. That’s when I start looking to the long side, using a Japanese Candlestick reversal as my entry signal.

The Stock Market Academy

Assessing a Technical Collapse of the Market