Yesterday, the stock market had one of the ugliest last-hour reversals we’ve seen in quite some time. The S&P 500 erased a 30-point gain and ended the day down 15 points. That was a 45-point drop – a loss of more than 1.6% in the final hour.
Market pundits tried to explain the reversal as a negative reaction to the FOMC minutes that were released at 2:00 p.m. yesterday afternoon. But the pundits neglected to report the market initially rallied when the minutes were released.
The S&P 500 was trading at 2730 at 2:00 yesterday afternoon. As soon as the FOMC minutes were released, the index rallied all the way up to 2747. The initial reaction was positive. The stock market liked what the minutes contained.
So, what caused the last-hour selloff?
The explanation is simple. The market ran into resistance, buyers ran out of gas, and the market turned lower.
Look at this 15-minute chart of the S&P 500…
15-minute charts are ultra-short-term. They help to identify patterns that might play out over a one- or two-day time frame.
As you can see from this chart, at the highs yesterday the S&P 500 was nearing the resistance level of last Friday’s intraday high. If you recall back then, the index rallied above 2750, met resistance, and then turned lower. The S&P then closed last Friday at 2732 – well off the highs of the day.
Yesterday, we got the same sort of action. The S&P 500 rallied as high as 2747. That was near the resistance level of last Friday’s high. And that’s where the buyers ran out of gas. The index turned lower, and it closed well off the highs of the day.
The most important development on this chart, though, is the S&P has broken below the support line at 2707. That opens the door for a move to the 2675 support level. I suspect we’ll quite likely see that level hit before buyers are willing to step up again.
I’ve been arguing for the past week that even though the recent bounce in the stock market has been quite strong, the most probable outcome is we’ll see a retest of the 2580 low on the S&P 500. Yesterday’s market action helped to confirm that position.
It won’t be a straight shot lower. The market is never so accommodating.
Instead, we’ll likely have plenty of short-term “fake-out” moves that cause traders to question the validity of their positions.
Believe me, as the S&P was challenging the 2750 level yesterday, I was questioning the short position I recommended for my subscribers last Friday. But history suggests stocks should move lower again from here. And the 15-minute chart of the S&P 500 confirms that opinion.
So, we’ll stay short the market for now. And we’ll take another look at the trade as the S&P approaches the 2675 level.
Best regards and good trading,
Jeff Clark
P.S. We’ve just published a new special report on technical analysis and chart patterns. It’s a comprehensive primer on some of the best patterns I look for when making trade recommendations.
Delta Report subscribers can access it right here…
Reader Mailbag
Today, some thoughts on gold stocks…
Hi Jeff. All my work says that, if HUI breaks the Dec ’15 low of 160.25, get ready for some upside fireworks in gold stocks. This would probably wash out a lot of the weak-handed longs. I believe this low will be taken out. Time wise, I don’t think this is too far away. Just my 3 cents of input. Thank you for your great work!
– Dave
And on our most recent Delta Report trades…
I’m a new subscriber to your publication and wanted to let you know that I appreciate the hard work you do. I got in to the AAOI put trade at $5.50 and so far it’s looking like a winner. I also like the CSCO play but it’s a lot more speculative. Have made and lost a lot of money in options in the past, so I want to stay disciplined and ride out the trades as per your recommendations, i.e. not sell AAOI and get into CSCO. Thank you.
– Fadi
Last night I went over the portfolio. I didn’t take a position in PAAS initially. Checked everything out last night though, and it looked really good. Then I read the news and thought I wouldn’t be able to sell puts at a decent price expecting a gap. Happy for the drop and I sold at a decent price. Already up as I type. We will see! Great heads up/update to others and it just confirmed what I saw and slowed my knocking knees!
– Marty
Jeff, I agree, let’s hold out longer for the CSCO put. I was afraid your message minutes ago was to sell out.
I think odds are strong in your favor that we will see a market plummet in the coming days from the correction phase 2 (of 3 plummets). If so, then CSCO should fall considerably too, and it shouldn’t be too many days away, based on 1987 and 2011.
Now, if you start to see indications that your thesis has changed, and we’re going to get a V bounce upward that continues, rather than the Kiss of Death, let us know so we can plan accordingly. Last Friday I took short-term profits on my highest-gaining stocks, so that I can buy them back when the next correction phase plummet occurs in the coming days, which I thought had already begun.
Don’t give up on your thesis too easily; it just might need more time to happen. Everything in this multi-year market takes longer to happen, except maybe the plummet week of Feb. 5, but short-the-VIX ETNs, computer algorithms, and the like seem to have made that correction more acute, if my info is correct.
– Tim
As always, don’t hesitate to send in your trading stories, questions, comments, and suggestions right here.