Gap Down and Bounce?

The Fed meeting is in a few days.

Technical Edge — 

• NYSE Breadth: 85% Downside Volume (!)

  • 4th Downside day of 80%+ in the last seven sessions

  • Back-to-Back weeks of 80%+ downside volume

• NASDAQ Breadth: 78% Downside Volume 

• VIX: ~$34

On Friday we wrote: “Despite a faster tape, we have been moving slower and that’s really important right now.”

By cutting down our position size and reducing our overnight exposure, we are keeping our stress down in what has become a very difficult tape. 

The last time we had back-to-back weeks of 80%+ downside volume on the NYSE was January 2020. It was followed by a 5.5% bounce in the S&P to all-time highs. The only other time we saw this observation over the last ten years was in Q4 2018 and there was actually three straight weeks of 80%+ downside volume, but it eventually led to the bottom. 

As you can see, it’s not very common.

Game Plan — S&P & SPY, TLT, Individual Stocks

We have a mild gap down on Monday morning following a brutal, 85% downside day on Friday. Can we gap-down and bounce?

S&P 500

One scenario playing out in my head is reminiscent of the action in March, where the market declined into the Fed, then surged after the rate hike news. After so much downside lately, we now have to wonder if that action is close to being finished. 

I am really only watching two levels: