Mapping Out Two Scenarios for the Market

We enter Monday on thin ice, wondering if it holds or not.

Technical Edge — 

• NYSE Breadth: 87.3% Downside Volume (!!)

• NASDAQ Breadth: 74% Downside Volume 

We were on the verge of a 90% downside day on the NYSE and I’m surprised we didn’t get it. Either way, we’ve had two back-to-back days of 80%-plus downside days. 

Does that mean we will bounce today? No. 

However, we’ve had two back-to-back 80%-plus downside days in the last 12 months. Once at the beginning of December and another in July. In both occasions, the S&P enjoyed a healthy rebound. 

I do wonder if we could be near some sort of washout/capitulation situation. Does that thrust us into the 2022 lows? It should, in my opinion, but maybe it will take some time. 

On Friday, we laid out one five-wave (ABCDE) scenario to getting there. The flip side is, we could get there all in one flush, but we’ll see. The Fed speaks next week, and in the back of our head, we’re wondering if the market sets up like it did in March: Sell off into the Fed and rip afterwards. 

Game Plan 

Everyone knows I’m a big fan of taking Monday’s slowly. Well, I’m an even bigger fan of it today. We had a really great stretch there of trading individual stocks as the VIX drifted back down to the low $20s. 

Now back near $30, the individual trades will likely take a back seat to index setups. Hey, I don’t like it either!! But we can’t fight the market; it’s the one that tells us what to do!

S&P 500, Bonds (TLT) and 1 Individual Stock Trade

We have been bearish since the February rally. My only regret is not being more bearish, but it’s difficult to be when: 

1. It doesn’t come naturally (we are bulls at heart and the data supports it) and 

2. It goes against the trend of the last 12 years. 

The question now becomes: Will this be a three-wave move lower (an “ABC” correction) or a five-wave move (an “ABCDE” decline)? That is, assuming we retest the 2022 low. 

Bigger picture — We are either looking for a potential rebound back to the 4350 to 4365 area (that gets sold) or a continuation lower into the 4100 to 4150 zone. 

The war in Ukraine has not seen a significant improvement, inflation is “maybe” peaking and the Fed is tightening even more aggressively than anticipated. So our rationale behind a retest of the lows is not some perma-bear fodder. It has real rationale. 

On the upside