This Selloff is Puzzling. Stay Patient and Wait for the Right Setup Before Your Next Trading Decision.

Is yet another dip buying opportunity just around the corner?

This morning, I did a very rare thing.  I sent out a “Go to Cash” directive to paid subscribers.  Here is the gist of the communication: 

“This morning’s employment numbers have roiled the markets further. The 114,000 new jobs created was well below expectations, and the unemployment rate rose to 4.2%.

This comes in the wake of worsening data from the ISM Purchasing Managers Report, the lower than expected ADP private payrolls, and the falling job opening numbers (JOLTS).  Moreover, Fed Chairman Powell, in his press conference this week, noted that the Fed was watching the employment market as a clue toward making its next interest rate decision.

The market is clearly sensing that the economy is weakening and that the Fed is now behind in its need to cut rates.  In other words, recession fears are rising.”

On the other hand, as I discuss below, the sudden rise in fear may be a sign that some sort of significant reversal may appear sooner rather than later.

How Things Are Shaping Up

Now, as the morning has developed, a few interesting things are emerging which are worth noting.

First, the S&P 500 (SPX) is now trading well outside of its lower Bollinger Band. This type of action usually preceded a reversal to the mean (in this case the 20-day moving average).  But before SPX can tag the 20-day line, it will have to rise above the 50-day line. That means that there are now two major important resistance levels where traders are waiting to hit the sell button again.

Second, we are approaching a major support band between 5000 and 5300 on SPX. That’s where two very large VBP bars and the 200-day moving average rest.  That’s where potential dip buyers and short sellers are waiting to see if they can push the market in the direction they desire.

Third, right now, the short sellers are in charge as the ADI line is steadily falling.

Fourth, and this is a big one – the RSI is nearing 30.  That means that even though the shorts are in charge, the market is getting oversold and some sort of consolidation, bottoming attempt, is likely to take place.

Separately, the New York Stock Exchange Advance Decline line (NYAD) is still holding above its 20-day moving average.  This suggests the broad market is still in better shape than the large cap tech stocks which are still getting pummeled.

Finally, the CBOE Volatility Index (VIX) has spiked to 27 from just below 16, while the CNN Greed/Fear Index is at 26.  Both of these levels suggest panic selling is now taking place.

Bottom Line

It’s too early to know where things will end up.  The markets are clearly telling the Fed that it needs to ease.  The Fed, will likely do what it always does – wait until it’s too late to do something, and then overshoot the mark when it panics.

On the other hand, it is plausible that as oversold levels materialize, we may get some sort of a V bottom in place.  It is equally possible that this market will continue to fall, perhaps to the 200-day moving average, or perhaps to a lower level.

Because of the unnatural way things are developing, there is no point in taking huge risks until the situation clears up.

All I can say is that at this point, the best thing to do is to raise cash and wait to see what happens next as you make a shopping list and see how things go.  But given the ridiculous rise in the fear gauges, I wouldn’t be surprised if we get a nice opportunity to buy the dip in this market, perhaps sooner rather than later.

So stay patient, build a shopping list and stay tuned.

Thanks to everyone for your ongoing support.  I really appreciate it.

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