Following the third day of selling that was triggered by the hawkish comments of Fed Chairman Jerome Powell, all the major indexes broke key support levels on Tuesday. It was another day of broad selling and was made worse as oil and other commodities reversed lower after strong action on Monday.
With stocks under so much pressure, technical conditions are becoming oversold and traders are looking for an oversold bounce. However, the sharply negative reaction to Powell trapped many market players, so there will be a strong inclination to look for an escape into strength. The shorts also will be lined up to build positions on a bounce into resistance levels.
The market is highly data-dependent right now, and if a bounce does develop it likely will be in response to economic news. There is an ADP employment report, Chicago PMI and oil inventory numbers here on Wednesday that may cause some movement. The next big news is the August jobs report that will be released pre-market on Friday.
In this type of market environment, it is important to be clear about your market strategy. If you are very short term, then you need to be watching for counter-trend moves, but the biggest mistake that traders make is to let these short-term trades turn into longer-term investments when they don't work.
It is also important to note that the action in this market is highly correlated. It is driven from the top down. When index ETFs such as the Invesco QQQ Trust (QQQ) are sold, then all 100 stocks in the ETF are sold as well. On Tuesday, about 85 of the 100 stocks were negative. In other words, this is not a market for stock picking. Fundamentals and valuations do not matter when indexes and all the stocks in them are dumped.
The good news is that this indiscriminate selling always creates good opportunities in individual stocks, but timing is the key. You do not need to buy into the teeth of a decline to end up with great entry points. You can wait for support and better relative strength and have less risk.
We have a slight bounce on tap based on the pre-market action, but oil is being hit again by economic worries and we now have strong overhead resistance after key levels were broken on Tuesday.