Hey, Evolvers … Long time, no talk!

As I mentioned on Friday, I was away from my screens for the past two days, celebrating Rosh Hashanah with my family.

In my absence, the stock market has been teetering on the edge of some critical technical indicators…

On Tuesday, the S&P 500 ETF Trust (NYSEARCA: SPY) traded below its 200-day weekly moving average for the first time since the historic pandemic selloff of February 2020. 

The index was also red six days in a row leading into this morning — another event that hasn’t happened since 2020. 

This all sounds bad, and while that’s true from a technical standpoint, we’ve still gotta be prepared for anything. 

The market has a nasty tendency to do what traders are expecting least. And with the SPY as oversold as it currently is, the possibility of a brief rally is definitely on the table. 

That said, I tend to lean bearish and the current market backdrop isn’t doing much to make me change my mind. 

At the time of writing (early Wednesday morning), I’m still holding puts on the ProShares Bitcoin Strategy ETF (NYSEARCA: BITO), but I’ve cut my position in half. (I’ll break the entire trade down after I close the position out.)

In the meantime, we’re at a key pivot point for the major indexes, and I’m seeing some contrary signals.

With that in mind, I’d like to lay out both sides of the argument for you today. That way, you can make your own informed decisions and develop a game plan that works for you.

Keep reading and I’ll show you the four important signals — both bullish and bearish — to consider during this critical week for the markets.

Bearish Signals

The Market Has Never Bottomed with a Hawkish Fed

Stocks usually struggle during periods of quantitative tightening (QT) — where the Fed is raising interest rates and decreasing its balance sheet.

This is what’s been happening all year in an attempt to combat decades-high inflation, with the SPY down almost 24% YTD in response. 

Here’s the interesting part…

If you look at the history of QT, the stock market never bottoms before the Fed stops tightening. Not once.

From 2017 to 2019, the Fed tightened aggressively, leading to an extended period of flat returns for the major indexes.

But once the Fed changed course and began easing again in early 2019, the market started ripping … like clockwork.

This fact makes me think the market has further to drop this year, which is why I’ve been positioning myself so bearishly the past few weeks.

We’re Seeing the Most Put-Buying Since the Great Recession

As the market is losing key support levels, traders are rushing to grab downside insurance at a record pace.

Options traders have spent $34.3 billion on put contracts in the past four weeks, $9.6 billion of which was bought in the past week, according to Options Clearing Corp data analyzed by Sundial Capital Research.

To put things in perspective, this is the largest amount of put-buying since 2009, quadrupling the average over the past two years.

The options flow is sending a crystal-clear message — institutional investors believe there’s a high probability that the market will tank further than it already has this year.

Bullish Signals

The SPY Reclaimed the June Lows

As important as the macro indicators I just discussed are, I usually lean towards technical analysis to inform my trading strategy.

(On that topic … If you wanna learn all the ins and outs of my options trading strategy, check out my free ebook by clicking right here!)

So, let’s look at some technical indicators in the major indexes that are actually bullish for once.

On June 17, the SPY closed at a low of $365.86 before surging into an epic bear market rally that topped out in mid-August.

On Tuesday, the SPY closed at $363.38, breaking the June lows.

But then, this morning, the SPY surged nearly 1% intraday, immediately reclaiming the June lows.

This is a bullish signal as it seems like the panic selling just isn’t there. Let me explain…

Normally, when charts lose key support levels, they immediately trade down as stop losses are taken out.

In contrast, the SPY’s resilience in the face of this negative technical indicator is an encouraging sign for bulls. 

Had the index tanked today, I’d probably be day trading puts. But the fact that the SPY reclaimed the June lows so quickly makes me think the market could rally into the end of the week (and possibly further).

The Bad News Might Already Be Priced-in

Let’s ask ourselves an important question … what are the main reasons the market has sold off this year?

• Inflation at a 40-year high
• Interest rates at a 15-year high
• Bond market rallies
• Commodity prices surging
• The Russia-Ukraine conflict
• Corporate multiple contraction (the slowing of earnings)

Now ask yourself another question … will the market be surprised if any of these negative catalysts escalate further?

My answer is … probably not. The obvious bad news has been priced-in for some time now. 

At this point, I think it’ll probably take an unexpected ‘black swan’-type event for the market to take out the lows yet again.

But that’s the tricky part. They’re called ‘black swans’ for a reason … we never know how (or when) they’ll show up. 

Final Thoughts

I think it goes without saying that this is a critical inflection point for the markets. If the SPY loses the June lows again, look out below. 

But if the index mounts a rally into the end of the week, it’s possible the bottom has been put in and an uptrend can resume. 

Regardless of what happens, remember one thing…

As traders, we have a superpower — the ability to play the market in any direction. 

While long-term investors ‘hold and hope’, Evolvers should relish this once-in-a-decade opportunity to take advantage of this historic market volatility. 

There have been some amazing trading opportunities on the way down. And now that I’m finally seeing some bottoming signals, I’m looking forward to some juicy call-buying setups on the way back up.

That said, those with less experience should be cautious in this environment. Anything can happen at any time. Trade the best setups only and cut any losses immediately.