January 22nd, 2022

Selling Into Strength

This past week saw extreme selling to start off the week, but by Friday we were nearly back to where we started. Once again showing how range-bound the market is, but last week was different since we saw the return of intra-day swings and afternoon melt-ups.

Here’s a weekly chart of the S$P 500 (SPX) for the past year. This is the fifth time the index has come up to the long-term trend line, but you can see from the chart that the time between touches is getting smaller, which can mean a reversal is coming.

I drew white circles around the touches that had a tall upper wick, a bearish candle formation. I drew yellow circles around the touches that have a tall lower wick, a bullish candle formation. A tall lower wick forms when bears push the price down, but bulls pull it back up, which leaves a long line or shadow.


The last time that happened you can see we retreated the following week, so now we’re left to wonder if we can finally break through or if we’re going to retreat once again.

A bear market rally could bring us 5-10% higher, which would put us around the August highs of 4300. The difference is if we head up to 4300 from here, we’d break of the long term trend line. Some might take that as a sign the bear market is over, or at least a major pivot has occured.

Despite the bullish behavior toward the end of the week, the issue I have with the market moving higher up to 4300 is that this earnings season has been full of companies warning about a zero–to-low growth environment. So why would investors buy an 18 Price-to-Earnings ratio for no growth?

The S&P 500 is historically mixed with a slight bearish bias over the next two weeks with another period of weakness coming soon at the end of February. As a result, I’m a seller into strength right now.

Get Today’s Trade Idea (and more)

While I am still bearish overall, we have several reports coming out this week that could help move the markets higher. Let’s take a look.

Tuesday – PMI Composite Flash – 9:45 am EST – Manufacturing and Services are supposed to fall deeper into contraction in January. Anything less than 50 rating means contraction. The Manufacturing Index is expected to show 46.5 and Services at 45.5.

Wednesday – EIA Petroleum Status Report – 10:30 am EST – Crude Oil inventories are expected to rise week-over-week, showing weak demand and potentially a reduction in prices.

Thursday – Durable Goods Orders – 8:30 am EST – The market is expecting to see durable goods rebound in December’s reading. November showed -2.1% in new orders, but the market is expecting to see new orders up around 2.8% in December.

Thursday – GDP – 8:30 am EST – Fourth quarter GDP is expected to drop from 3.2% to 2.7%.

Thursday – International Trade In Goods – 8:30 am EST – The U.S. goods deficit is expected to widen by about $6 billion in December.

Thursday – Jobless Claims – 8:30 am EST – The report is expected to show a jump in claims from 190k last week to 202k, bringing the 4-week moving average up to 206k.

Thursday – New Home Sales – 10:00 am EST – Mortgage rates dipped and new home sales were briefly on the rise, but the market is expecting to see the downtrend continue this week. The annual rate is supposed to drop from 640k to 614k.

Friday – Personal Income and Outlays – 8:30 am EST – Personal Income month-over-month is expected to drop, which is good for wage inflation but not so good for workers. The Core PCE Price Index year-over-year is expected to drop 4.7% to 4.4% and the PCE Price Index year-over-year is expected to drop from 5.5% to 5%. It’s a good sign that inflation is coming down and that is likely to solidify the Fed’s decision to reduce their next rate hike to 0.25%.

If you have any questions, comments, or anything we can help with, reach us at any time.
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Jeff Wood

Editor, Filthy Rich Dirt Poor

Trader, Options Testing La

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