\tThe proverbial rubber band was stretched too far to the downside. We were likely to get a solid bounce higher<\/a>.<\/p>\n \tThat’s what happened on Thursday and Friday. The S&P 500 rallied all the way back up to the 2382 level – which was its previous support. Now, it’s resistance.<\/p>\n \tSo, now we’re at an inflection point. A strong push higher from here and the bulls take back control. But, if resistance holds, then look out below. Stocks will be headed lower over the next few weeks.<\/p>\n \tIt could go either way. But my money is betting on the downside. Here’s why…<\/p>\n \tThe S&P 500 closed Friday just below its 9-day exponential moving average (EMA) at 2383. And the daily chart has the look of a bear flag pattern. Take a look…<\/p>\n \t \tWednesday’s big decline had the look and feel of an “impulsive” move – meaning there was plenty of volume and plenty of selling pressure behind the decline. But, since the decline started with most technical indicators in “neutral” condition, they quickly reached oversold levels and set up for a solid one- or two-day bounce.<\/p>\n \tThat’s exactly what we got.<\/p>\n \tIn two days, the S&P recovered almost 50% of Wednesday’s decline. It jumped back above the 50-day MA line. Now it’s challenging the resistance of the 9-day EMA.<\/p>\n \tIf you’re leaning bearish, then this is an ideal spot at which to take a short trade. You’d be shorting stocks at resistance, and you could keep a tight stop loss on the trade.<\/p>\n \tFor example, if the S&P were to rally above 2395, then it would clearly break above the 9-day EMA and the momentum would shift back to bullish. You could cover the trade for a small loss of about 12 points on the S&P. That’s a loss of about 0.50%.<\/p>\n \tOn the other hand, if resistance holds and the market presses lower from here, then look for the S&P 500 to decline below Wednesday’s low of 2353. In fact, if the bear flag pattern plays out, then the price target is somewhere around 2340.<\/p>\n \tThat would be a 43-point gain on a short S&P 500 trade, or nearly 2%.<\/p>\n \tSo, the risk\/reward setup right now favors the bears by a 4:1 margin.<\/p>\n \tOf course, there is a fly in the ointment…<\/p>\n \tThe Volatility Index (VIX)<\/strong><\/p>\n \tThe VIX generated a buy signal on Friday by closing back inside its Bollinger Bands.<\/p>\n \tBut the decline in the VIX was so large – a decline of almost 18% – that we have to wonder if most of the possible upside from the “buy” signal has already happened.<\/p>\n \tVIX option prices<\/a>, which – prior to last Wednesday’s market decline – were indicating a higher price for the VIX going into mid-May and early June, are still pointing to a higher VIX over the next few weeks.<\/p>\n \tThough, when the VIX was trading above 15 on Wednesday, VIX options were pricing in a lower VIX. That’s one of the reasons I told my Delta Report<\/em> subscribers not to add short exposure during Wednesday’s decline. The VIX option prices did not support a further selloff in stocks.<\/p>\n \tAfter Friday’s market action, and with the VIX back down near 12, the options are once again pointing to a higher VIX over the next few weeks. And a higher VIX usually correlates to a lower stock market.<\/p>\n \tSo, I think traders need to remain cautious. Aggressive traders can use the recent bounce as an opportunity to establish new short trades.<\/p>\n \tThe upside for stocks looks limited from here.<\/p>\n \tI’ll update Delta Report<\/em> readers on these trends throughout the day on Jeff Clark Direct<\/a><\/em>.<\/p>\n \tBest regards and good trading,<\/p>\n \t \tJeff Clark<\/p>\n \tP.S.<\/strong> Thanks to all my readers for your thoughts, insight, and great trading stories. Please keep that feedback coming right here<\/a>.<\/p>\n \tHere’s what came in recently…<\/p>\n \tStocks<\/h2>\n
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