The Drop is Coming


BACK SEAT - FX markets have taken a back seat to the stock market over the past couple of sessions and I have been watching and trading along with the moves. As you know, I had been sitting on an SPX500 short position for several weeks before finally booking profit on Friday, with the hope of selling back into another rally. What I didn't anticipate was that the market would collapse as much as it did on Friday and this set up a rare opportunity for me to actually take a long position. The play was purely short-term and technical in nature. So what did I see?

NO BRAINER - At the close on Friday, the hourly RSI on the SPX500 chart was tracking below 5!! That is an absurdly low and a very rare print for an RSI on an hourly chart or any chart for that matter. You can bet that whenever I have an opportunity to establish a long position on a below 5 reading in a liquid market, I am going to take it without much thought. And so, I bought into the Monday open dip and managed to catch a sweet trade to the upside as the technicals unwound from those violently oversold readings. 

STILL BEARISH - But overall, my bearish view is still very much in place and the core bias is to keep selling those rallies. Low and behold, the rally that ensued pushed back up to levels where I had initially exited for a profit on Friday and there I was, with an opportunity to jump back in on the short side. So in the span of 48 hours, I had booked a nice profit short, went long and caught a nice profit to the upside and was back on the short side again. I will be happy to add to this short if the opportunity presents, though ideally, the market stalls out quickly and heads right back down through the Monday low. 

THE TRUTH - It's true. The Fed probably won't hike this month. But another very important truth is starting to get more attention. It's also true central bankers are worried about exhausted monetary policy and are realizing its limitations have been reached. And if these limitations have been reached, this means the strategy is no longer effective. The strategy of easing policy to stimulate risk markets is a thing of the past.

The limitations of monetary policy have been reached = stocks much lower! Via @joelkruger

UPSIDE LIMITED - So as much as the stock market may still try its hardest to rally back on dovish Fed Brainard comments and the probability the Fed will hold off this month, we have reached that point where upside is limited and deeper setbacks are around the corner. It was only natural to see the dip buying on Monday given how intense this bull market has been. Now we just have to wait for a topside failure into this rally and break back below the Monday low so the bulls officially know the time has come to step aside. 

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