Well. The situation in the stock market seems to have taken a nasty turn. From its highs at 4,100 on Tuesday, the S&P 500 has peeled off 150, broken below both its 200-day (black line) and 50-day (purple line) moving averages…

Source: Yahoo Finance

Let’s start with Tuesday’s high at 4,100. You may recall that the latest read on inflation – the Consumer Price Index (CPI) – came out Tuesday morning, before the market opened. The CPI number was better than expected, and investors went wild, pushing the Dow Industrials up 800 points and the S&P 500 up 140 right at the open of Tuesday trading. 

Now, that ramp job early Tuesday was pretty extreme. Especially when you consider that there was a Fed rate hike coming the very next day, Wednesday, December 14th. So, no big surprise that stocks backed off their highs and the S&P 500 retreated below the 200-day MA. Stocks still finished the day with decent gains.

Stocks fell a little after the Fed announced a 50 basis point hike on Wednesday. Again somewhat reasonable as the Fed acknowledged it still has “more work to do…” but also said “We think the appropriate thing to do now is to move to a slower pace.”

Both of these statements are consistent with expectations that a couple more rate hikes are coming early next year. And that the Fed plans to pause after the March meeting.

Which made Thursday’s utter beatdown a real surprise, at least to me. 

Now, I’ve learned that it is a bad idea to think that the market is wrong. Because if you start thinking the market is wrong and you are right, well, that’s a good set up to make bad decisions. 

It’s not productive to dwell on what’s happened and what went wrong. Brain power is much better spent simply accepting the new information and assessing what it means for the future. 

Which brings me to the red horizontal line and the shaded circle I’ve added to the chart above. 

In the shaded circle, you can see a medium-sized red bar next to a larger green bar, with a good deal of space between the top of the red bar and the bottom of the green bar. This is called a “gap” and a gap gets created when one day’s range takes place completely outside of the previous day’s range. In the case of what I’ve highlighted, every bit of the green bar is higher than any part of the red bar that comes before it. 

One of the inviolable rules of technical analysis is that all gaps get filled. That eventually, a daily trading range will move through the gap and enter the daily range that occurred before the gap was created. 

The red line I drew shows the point at which that gap will be closed. It sits at 3,818 on the S&P 500. And I guarantee you that I am not the only one watching that gap at 3,818. And the odds are pretty good that buyers will step in when that gap gets filled.

But, so far today, the low for the S&P 500 is 3,831.

Close, but no cigar…

One of the hardest things to do in investing and trading is nothing. Just sit and wait. But that’s what this situation calls for. 

That’s it for me this week. Take care, have a great weekend and I’ll talk to you on Monday.

Brit Ryle
Editor-in-Chief
Pro Trader Today