The action in the stock market yesterday was ugly.

It really was. There’s no other way to describe it. Traders stepped up to buy on the opening weakness. But they likely regretted that decision and seemed to move back to the sidelines by mid-day.

The low on the S&P yesterday was just under 2702. That’s close enough to my immediate downside target of 2700 to consider it hit.

But stocks still feel heavy. And there’s probably more downside ahead. I still think we’re headed towards a retest of the 2581 closing low in the days and weeks ahead.

So why… you may ask… did I tell my subscribers to sell our short exposure?

I’ll answer… because the risk/reward setup has changed.

I’d been watching all the various financial news networks (CNBC, Bloomberg, Fox Business) since very late Tuesday night (yes, in my home office I have four television sets… three are set to business news… one is on ESPN). All of the networks were horribly bearish about the Cohn resignation, and about the prospects for a trade war over the proposed steel and aluminum tariffs.

So, my thinking is that the bulk of the potential “bad news” is already baked into the market.

What happens if we get a favorable NAFTA negotiation as a result? What happens if the tariffs are much less than previously suggested? If our trading partners say, “You know what? Tariffs are bad. So if you’ll agree not to impose tariffs on us, we’ll drop our existing tariffs on you,” what then?

For the past few weeks, I’ve been arguing for a retest of the 2581 closing low on the S&P. And, frankly, I still think we’ll eventually get back to that level.

But the market is already so familiar with all of the potential pitfalls. It seems to have already discounted the risks. And now – it seems to me at least – the risk is on an upside surprise.

I’m not betting on it. I’m not going to tell you to get aggressively long stocks right here. But I think the short sellers are too confident. And I don’t want to be part of that group if we get any sort of bullish news over the next day or two.

Remember… I’m looking to buy aggressively when/if we get a retest of the 2581 low. That’s the BIG play in this scenario.

I’ll happily take advantage of short-term overbought and oversold conditions to execute quick trades. But I think the real potential for making big money is going to be on buying the decline towards the 2581 low. That’s going to take at least a few days – or maybe even a few more weeks – to play out.

Stay nimble with your trades. But, mostly, stay with a big chunk of cash.

Best regards and good trading,

Jeff Clark

Reader Mailbag

Today, two notes from Delta Report readers on a recent Direct blog post, “I Wish I Could Fire 20% of my Subscribers Every Year”…

Hello Jeff. Your attitude towards the markets that you comment on has had a very beneficial effect on my discipline towards all areas of trading/investment, for which I am most grateful. Actually, it seems to me that many of your other subscribers (not the 20%, of course) are saying something similar, but in different words.

– Alan

I saw your note from Friday. I’m still new to your service; I subscribed in October 2017. I did write to you about being wrong about the selloff (you were right).

I’m still happy about your service. I bought GE calls, made sense to me this time. I have to be honest it wasn’t easy because of my bias toward this company. Why isn’t Jack Welch in jail? (Loving DDD, too.)

Have a great week! Hoping for a new pick this week; I know, the market needs to chill!

– Jeffrey

As always, please continue to send your questions, comments, and trading stories right here…