- The S&P 500 E-mini contract has been negative during the trading session on Monday again, threatening to break down below the previous low.
- We are essentially testing the idea of a “double bottom”.
- It looks as if it is probably only a matter time before we break through it.
S&P 500 Breakdown and Breakout Scenarios
If we do break through that level, anticipate that the S&P 500 E-mini contract could go down to the 3600 level, followed by the 3500 level. After all, there’s really no reason to think that stocks are suddenly going to be a great value, despite the fact that some pundits on CNBC are talking about how certain stocks look “cheap.” The fact is that things can get cheaper, and they very much look like they are about to.
If we do rally from here, I’ll be waiting for signs of exhaustion to start shorting again. There is no reason to be buying stocks here, because most of the things that are causing negativity in the stock market right now have to do with a serious macroeconomic situation that is only getting worse. I do believe that it is probably only a matter of time before any rally get squashed, but I’m also cognizant of the fact that we are quite a bit oversold at the moment. The play might be to wait for some type of bounce to start shorting, and quite frankly I was a bit surprised to see that this market could not bounce significantly after last week’s selloff.
While that is an extraordinarily negative turn of events, the reality is that markets don’t go in one direction forever. In a bear market like we are in right now, rallies can be quite brutal. It is because of this that I would rather sell into strength instead of trying to sell into weakness. It does take quite a bit of courage to do that, but quite frankly I have learned over the years that the most uncomfortable positions are quite often the correct ones. Until the Federal Reserve changes its monetary policy, it’s very unlikely that rallies in the S&P 500 will be sustained for any significant amount of time. In this environment, I think we are going lower and it’s only a matter of time before we go significantly lower.
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