The expected seasonal decline in the summer selloff is occurring on schedule. We previously mentioned in an article titled “Pumping The Brakes” that there is a tendency for a decline in the next few weeks, and the current charts suggest that this decline may have begun.
This is the fourth week since the article was published, which aligns with the expected timing.
What happens next?
Should we buy the dip?
It may not be the right time yet. There is no evidence to support the idea that the bottom of this dip has been reached. In the past three days, SPY has rallied up to the declining 5-day moving average and then experienced selling.
Can you guess what happened today? It’s the fourth occurrence.
Meanwhile, QQQ is testing its 50-day moving average after reaching a recent high slightly earlier than SPY. QQQ has come down a bit more than SPY, around -5% from the recent high to today’s low, compared to SPY’s -3% drop.
If the 50-day moving average cannot provide support, the next significant levels below are a pivot near $357 and the 100-day moving average near $344.
SPY closed near the daily lows and is approaching a retest of the breakout level around $444. Below that is the 50-day moving average near $441.
QQQ closed below the 50-day moving average. Keep an eye on the previously indicated support levels.
IWM is currently testing the support/resistance zone and the VWAP anchored to the all-time high.
DIA has benefited from buying rotation to industrials, which has helped it stay above the 21-day moving average until today. The next area to monitor below is $344-$345.
TLT (Bonds) and interest rate yields continue to be a market focus. TLT has rallied up to the declining 8-day moving average to alleviate the oversold condition. The question now is whether this was only temporary relief or if Treasury Bonds can continue moving higher and push yields lower.
BTC has remained relatively calm while stocks experience slight volatility. Although sellers appeared after yesterday’s upward move, the overall action remains rangebound.
DXY, the US Dollar, indicates that the path of least resistance may be higher. However, the real test will be the downtrend line.
VIX remains slightly elevated as we approach the CPI inflation report tomorrow morning.
The Closing Bell
Keep an eye on the upcoming CPI data that will be announced tomorrow morning. Here’s what to watch for:
Will higher-than-expected inflation data cause the market to decline? If so, pay attention to the previously mentioned levels.
Alternatively, can the market rally on good inflation data? If that occurs, observe how the indexes and individual stocks on your watchlist handle the 5-day moving average. Can they move above it? And can the moving average curl up and start moving higher too?
If these conditions are met, it might be the first sign of a potential short-term bottom.