Last Friday’s trading session was a bloodbath…
After Federal Reserve Chairman Jerome Powell made aggressive statements regarding a path of more interest rate hikes, the indexes sold off hard all day.
The S&P 500 dropped 3.4%, the Nasdaq 100 declined a whopping 4% and the Dow Jones fell just over 3%, or more than 1,000 points.
The bulls tried to stabilize the market when it reopened on Monday, but Tuesday’s session was another big bearish day.
Now, this wasn’t totally unexpected, as I told you two weeks ago that I would not be surprised to see a pullback of 5%-10% following the test of the 200-day moving average (MA).
But what we weren’t expecting was how the stock market reacted to Powell’s statements…
Discounting the Fed
You see, the stock market is a discounting mechanism. All known information is always “priced in” to stocks.
Yes, the market rallied off of the June bottom even though rates were already being increased.
But that’s because these hikes were already priced into the markets… Basically, rate increases were just playing out as expected.
As noted, the major indexes got hammered heading into the weekend.
The S&P posted its first 90% down day since the lows were made in June, which you can see on the chart above from Monday.
At this point, we need to see how the market reacts to this new reality and allow investors to digest it.
The Technical Picture
Futures markets are up slightly ahead of the open this morning, but the action yesterday actually caused some further technical damage.
With the exception of the Russell 2000, the major indexes, all closed below their 50-day MAs on Tuesday.
The last two times we saw the S&P closed below its 50-day MA (red line), it proceeded to drop 12% and 18%, respectively, over the following weeks.
No one can say for sure what will happen this time, of course, but I would like to see the indexes reclaim their 50-day MAs as soon as possible to keep the rebound alive.
On the other hand, if we see another heavy distribution day or 90% down day, I would expect the major indexes to re-test the recent lows currently about 8% below the market.
I’ll keep you posted as the situation progresses…
Did You Miss The Premiere?
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Embrace the surge,
Editor, Stock Surge Daily