Are we on the verge of the next leg lower?

By Jani Ziedins | End of Day Analysis

Aug 29

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The S&P 500 was crushed last Friday and it added to those losses Monday. But on the heels of Friday’s -3.4% bloodbath, Monday’s -0.7% loss felt almost quaint. The index even managed to poke its head into the green during Monday’s session. Unfortunately, that momentary relief was short-lived and prices slipped back near the intraday lows by the close.

The bloodletting started Friday when Powell announced the Fed’s primary focus was fighting inflation and it wasn’t going to let up until the job was done. That mirrors what he’s been saying all along, but it spooked some investors that were hoping for a lighter touch and a quicker return to easy money.

Complicating issues is we are quickly closing in on the Labor Day holiday and many institutional investors are spending the final weeks of summer somewhere other than behind their desks. That means big money managers are not there to steady the market if small investors overreact to these headlines and price action. The saving grace is these small fries don’t have much money, meaning they run out of ammunition fairly quickly and these irrational swings tend to stall and reverse fairly quickly.

What’s that mean for us? Well, it would be foolish to assume the worst is already behind us. These things are rarely one or two-day events. But at the same time, if big money is MIA and not participating in the selling this week, supply could dry up fairly quickly.

A violation of 4k support seems highly likely, but at this point, that will probably signal capitulation selling and not the start of the next big leg lower.

I’m not saying we can’t fall a lot lower than 4k over the next few weeks or months, just that it won’t happen until big money returns from vacation in the second half of September. Until then, expect the elevated volatility to persist, but in a more back-and-forth sort of way.

A really nice setup would be buying a violation of 4k support that bounces back above this key level. Put your stops under support and see what happens.

As for those of us with short profits from Friday and Monday, don’t get greedy and be ready to take profits soon. If the selloff resumes in the back half of September, it will be easy enough to reshort the market. In the meantime, it would be a real shame to let those profits disappear if prices bounce in a near-term relief rally.

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About the Author

Jani Ziedins (pronounced Ya-nee) is a full-time investor and financial analyst that has successfully traded stocks and options for nearly three decades. He has an undergraduate engineering degree from the Colorado School of Mines and two graduate business degrees from the University of Colorado Denver. His prior professional experience includes engineering at Fortune 500 companies, small business consulting, and managing investment real estate. He is now fortunate enough to trade full-time from home, affording him the luxury of spending extra time with his wife and two children.