Why Violating The 2022 Lows Could Be A Good Thing
Jani Ziedins | Sep 28, 2022 03:26AM ET
The S&P 500 slipped another quarter percent Tuesday, making this six losing sessions in a row.
Compared to the size of losses we’ve been experiencing lately, a quarter-percent decline almost feels like an up day, especially for a session that violated the 2022 lows.
Undercutting a widely watched level typically unleashes a big wave of reactionary selling, but this time the selling stalled and prices drifted sideways through the afternoon. This was not the price action we’d expect for such a monumental day, but the market has a nasty habit of doing the least expected.
This muted selling is most likely due to the majority of fearful owners bailing out ahead of the widely expected violation of the 2022 lows. If everyone sells in anticipation of an event, there is no one left to sell when it actually happens.
When the market doesn’t do what it is supposed to do, in this case, devolving into a panicked dash for the exits, we have to sit up and take notice. As bad as things feel near the lows, maybe we really are finally running out of fearful sellers and are on the verge of bouncing on the resulting lack of supply.
As volatile as this market has been, there is no way this falls asleep and simply drifts sideways into year-end. Instead, we are standing on a tipping point. Either the selloff continues, prices bounce, or the most likely option, a little more selling before bouncing hard.
But either way, it is hard for bears to explain Tuesday’s refusal to crash through the 2022 lows. Maybe the panic selling is a few hours delayed and will show up in force Wednesday. But if it doesn’t, we have to wonder how much selling is left in this latest down wave.
I’m happy to ride my short position lower, but at the same time, I’m paranoid and ready to lock in these profits because I know when this bounces, it will happen hard and fast. Holding a few hours too long will get very expensive very quickly.
As for how to trade this, hold the short as long as the selloff keeps going, but be ready to cover and even go long the moment the market starts rallying. The next bounce is close, we just don’t know if it will arrive Wednesday, later this week, or early next week. But it is coming.
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