March 13th, 2023

Where The Market Is Likely To Go After A Rally Turned Into A Rout

I won’t rehash the Friday bloodletting in the markets, but this headline was released at 9:10 EST Friday morning.

I won’t rehash the Friday bloodletting in the markets, but this headline was released at 9:10 EST Friday morning.

Those of you in the Options Testing Lab service have seen the S&P 500 (SPY) weekly chart before, but here it is for those who haven’t seen it in a while.  You can see that through 2022 we made a series of lower lows and lower highs, but that changed (green circles), but that trend shifted after the October lows.  We had a brief moment of higher highs and higher lows, indicating a possible trend reversal.

Aside from nearly giving up all gains from 2023, we’re at a critical point in the market because we could look back on this and eventually say it was just a steep selloff but it was still a higher low than what we had at the end of December 2022.

But if we break that low (around 375), we’d be headed right back to a bear market and the rally from October to February would be nothing more than a false breakout bear rally.

Seeing as how we’re sitting at 385 now and the last swing high was near 420, that means not only do we need to head higher from here, but we need a greater than 9% move from here to make a new higher-high.

The question is – what catalyst (earnings season is essentially over) is going to push the markets higher by over 9%? Especially when the Fed meets in two weeks. Maybe we will see some fantastic CPI numbers this week (more on that later).

So what camp are you in?

Where are my perma-bears? The larger bear market trend is still in play until we break above a 61.8% retracement from the top to bottom. So, my bearish friends are safe as long as the SPY stays below 430. Watch for support at 380. Profit-taking here may protect some of your bearish gains.

Don’t worry, I have something for the perma-bulls.  Your bullish trend is weaker, but you’re still ok as long we stay above 376.  Your chart pattern is breaking down, but you could easily read the chart below and say this is a standard bounce off a 50% retracement and we’re moving higher from here.

If that sounds confusing, it’s because it is. It’s not intentional on my part, but the reality is the long-term trend is bearish and the mid-term trend is bullish.

However, the short term created an ‘M’ reversal pattern and triggered a short entry. Here’s the S&P 500 (SPY) on a daily chart.

I think we may drift lower, and head into some chop around 380 – 383 and then again at 375. That means we could easily drop another 2.5% from here if we go to 375.

So, what might move the markets in either direction this week? Let’s take a look.

Tuesday – 8:30 am EST – Consumer Price Index (CPI) – The report is expected to show prices staying steady or a slight decrease.

Wednesday – 8:30 am EST – PPI-Final Demand – The Producer Price Index is expected to show prices increasing month-over-month and year-over-year but by a smaller percentage than the previous month’s report.

Wednesday – 8:30 am EST – Retail Sales – We get hit with two reports Wednesday at 8:30 and the retail sales report should be far less cheery than PPI. Although, the expected -0.3% drop in retail sales could show a cooling economy. The drop intensifies down to -0.9% loss if you exclude vehicles and gas.

Thursday – 8:30 am EST – Housing Starts and Permits – We’re expecting a flat number this month compared to last. Looking for housing starts to come in around an annualized rate of 1.315 million.

Thursday – 8:30 am EST – Jobless Claims – We’re expecting to see these numbers come in flat to slightly lower than last week. The consensus is 205k vs 211k from last week. That would bring the 4-week moving average to 197k.

Thursday – 8:30 am EST – Philadelphia Fed Manufacturing Index – The consensus is a reading of -15.8 vs the prior -24.3. While that is showing improvement, anything less than 0 is still considered a contraction.

Friday – 9:15 am EST – Industrial Production – Industrial Production is supposed to rise slightly by 0.4% month-over-month, but Manufacturing Output is expected to decline by -0.2% month-over-month.

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Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

Any trade or trade idea discussed is for educational purposes only.  They will not be tracked as an official trade recommendation.