The S&P 500 initially shot higher in the futures market on Monday but has given back the initial gains to form a shooting star. The daily candlestick does suggest that perhaps there are some selling pressure to come, but at this point, it would simply be a continuation of the overall downtrend. There has been nothing substantially different about the macroeconomic background to change the attitude of traders, and this rally is probably not long for this world.
If we break down below the bottom of the candlestick for Monday, I anticipate that a quick move to the 3800 level could be in store. Keep in mind that as we get closer to the end of the week there may be the “end of the month rebalancing” that you see at times, which can be somewhat noisy. Because of this, even if we break above the highs of the day on Monday, I still think that the upside is somewhat limited. The 4000 level would be the first area I would anticipate seeing trouble act, right along with the 50-day EMA which is sitting there as well.
It is not until we break above the 4200 level that I would consider this trend changed. Even then, I would probably have to see what is going on in the fundamental picture to get overly bullish. Until the Federal Reserve reverses its course, the S&P 500 will still have a lot of negativity surrounding it. With that in mind, I do believe that as long as monetary policy is set to be tightened, you have to look at rallies like this as potential selling opportunities.
That being said, you do have to be cautious shorting markets, because there is the inevitable “short squeeze” like we had seen on Friday. Although it looks like at the end of the day Wall Street is trying to claw back some of the losses earlier in the session, the reality is momentum is starting to slip away from the market right now, and I think it’s probably only a matter of time before we drop again. I do not like this market, and I have no interest in buying it. If we can break down below the 3800 level, we will almost certainly try to break down through the bottom again.
