Stock market… thy name is “frustration.”
Last week, the stock market teased the bears almost every day by dropping the S&P 500 below its 9-day exponential moving average (EMA) but then rallying it back above the line by the end of the day.
It was like when your high school buddies would offer you a ride home, then pull the car away just as you reached for the door. They’d wave you forward again. “Okay, for real this time,” they’d say. Then, just as you approached the car, they’d drive off again.
It was all great fun, unless you were the one trying to catch a ride.
So, the bulls spent all of last week laughing at the frustration of the bears, and at how they weren’t able to catch a ride. Then the market sped away on Monday with a “gap and hold” session to the upside.
Yesterday however, it was the bulls’ turn to be frustrated as the market reversed course with a “gap and hold” session to the downside. That’s when stocks gap lower, spend most of the day hovering near the low of the session, and then sell off even more in the final hour.
Welcome to summertime on Wall Street.
The market is doing its best to frustrate as many participants as possible. Bears who got too aggressive last week paid the price Monday. Bulls who got too aggressive on Monday paid the price yesterday.
Yesterday the S&P 500 closed right on its 9-day EMA line. Frequent readers know this is the line that defines the short-term trend of the market. If the S&P is trading above the line, then the short-term trend is bullish. If the index closes below the line, the short-term trend shifts to bearish.
Early in the day yesterday, I told my Delta Report subscribers the S&P was likely to close right on the 9-day EMA and frustrate the heck out of as many traders as possible.
That’s exactly what happened.
Of course, now the question is… Where do we go from here?
There are lots of indicators that suggest the short-term trend is lower. The NASDAQ and the “FANG” stocks (Facebook, Amazon, Netflix, and Google/Alphabet) are lagging. That’s a bearish sign. Volatility Index (VIX) option prices are skewed in favor of a higher VIX. That usually means a lower stock market. High-yield bonds (HYG) are breaking down from the rising wedge pattern I showed you on Monday. So it sure looks like conditions are skewed to the downside.
But…
The VIX closed yesterday just a fraction below its upper Bollinger Band. If the market sells off today, and the VIX pops higher, the VIX will close above its upper BB. That opens up the possibility of a broad stock market buy signal when the VIX closes back inside the bands.
So… my best guess… and it’s only a guess… is that the market will press lower today and maybe tomorrow. That action will take traders out of any aggressive long positions they took on Monday’s breakout. And it will coax the bears into taking aggressive short positions.
Then, just as it looks like the S&P is ready to fall off a cliff, we’ll get a buy signal from the VIX and a short-term stock market rally that crushes the bears who got too aggressive and coaxes the bulls back into position.
In short… the market is going to continue the sort of action we’ve seen since March. It’s going to continue to frustrate as many traders as possible.
So rather than continuing to run toward the car door you won’t ever be able to open, maybe the best strategy is to sit on the sidelines. We’ll catch a cab or an Uber (or Lyft) when the time is right to do so.
Be patient here. Don’t worry about missing a move in the market. Over the long term you’ll have plenty of low-risk/high-reward trades. Right now, though, the market is focused on frustrating as many participants as possible. So, most traders are going to get whipped around as the S&P dances around its 9-day EMA.
I’ll update Delta Report readers on these trends throughout the day in Jeff Clark Direct.
Best regards and good trading,
Jeff Clark
P.S. Remember, if you have any questions, concerns, or trading stories you’d like to share, make sure to send me an email right here.