Stocks swooned again but bulls showed signs of life as support levels came into view, notes Jon Markman, editor of Strategic Advantage.
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Strategic InsightBulls got off to a rough start Monday as the S&P 500 (SPX) continued its skid toward the 50-day moving average at 3,996. The benchmark index slipped to 4,017 before buyers swooped in and a recovery rally started.
At midday, nearly all of the early loss had been recovered. Unfortunately for bulls, the rally fizzled. The S&P finished down 0.7% at 4,030.
This is a classic match in the octagon between bulls and bears. Bears won a round last week and pushed back the rally to the 200-day moving average at 4,325. Now bulls must do the same. They need to hold critical support at the rising 50-day moving average. That marker is now at 4,003.
Trade on Monday was a decent start for bulls, however, they must finish stronger the rest of this week. A close below 4,003 will lead to panic selling and the expectation of a test of the June low at 3,640.
If bulls can get going on Tuesday they will face their first real test as the S&P 500 approaches 4,120.
Strategic TradeWe are getting closer to an easy trade. During the next day or so bulls will either hold support or fail miserably. Either way, there should be a low-risk trade. I expect to be as comfortable long as I am short at this stage. Reminds me of a line in Reminiscences of a Stock Operator that goes something like this: There is no bull side or bear side, only the right side.
The BackstoryThe Dow Jones Industrial Average (DJI) fell 0.6% Monday to 32,098 and the Nasdaq (IXIC) fell 1% to 12,017.
Technology stocks led the decliners while energy and utilities were the only gainers among the sectors.…Breadth favored decliners five-two, and there were 350 new lows vs 49 new highs. The leaders were Occidental Petroleum (OXY), ShockWave Medical (SWAV), Neilsen Holdings (NLSN), Plains All American Pipeline (PAA), and Vermillion Energy (VET).
The US ten-year yield jumped 7.9 basis points to 3.11% while West Texas Intermediate futures surged 4.1% to $96.89 a barrel.
"Crude oil trades higher extending last week's gain with supply concerns more than offsetting the potential negative growth/demand impact of Fed Chair Jerome Powell's higher-for-longer interest rate speech," Saxo Bank said in a note on its website. "Libya, one of OPEC's most volatile producers saw deadly clashes in the capital over the weekend sparking fears over supply to an energy-starved Europe."
On Friday at the Jackson Hole symposium, Powell committed to fighting inflation "until the job is done." The probability that the Federal Open Market Committee will lift interest rates by 75 basis points in September surged to almost 75% on Monday versus 28% a month ago, according to the CME Group's FedWatch Tool.
"Powell reiterated the Committee's commitment to price stability as unconditional, suggesting a further reduction in growth and a softening in the labor market are necessary conditions to rein in price pressures and furthermore, a lesser evil than failing to reinstate stable prices," Stifel chief economist Lindsey Piegza said in a note Monday.
In company news, Diamondback Energy (FANG) and Occidental Petroleum were among the top gainers Monday after oil prices rose on the possibility of a supply reduction by the Organization of the Petroleum Exporting Countries. Diamondback gained 4% while Occidental shares rose 2.3%. Exxon Mobil (XOM) and Marathon Oil Corp. (MRO) logged gains of 2.3% and 2.4%, respectively.