The market finally managed a decent oversold bounce on Wednesday. There were several failed attempts following hawkish comments by Fed Chairman Jerome Powell at Jackson Hole, but conditions were finally favorable for some rebound action to take place.
The big question is, what happens next? There is no way to know, so it is important to have a strategy to employ as conditions unfold from here.
The first step is to be very clear about time frames. If you are a longer-term investor, then the bounce action yesterday was meaningless. It does nothing to signal that a major turning point has occurred. It is just routine counter-trend action in a bear market. It is possible that it eventually develops into something important, but we won't know that for a while.
Technically speaking, the indexes are in a downtrend and have not hit any major support. The charts suggest that a retest of the June lows is more likely than not and there are plenty of market players betting that the retest will occur.
If you are trading short term, then you need to be looking for a little more upside as the market heads into the very important August Consumer Price Index Report next Tuesday morning. Although it is anticipated that CPI may soften again, the chances of a rate hike of 75 basis points at the next Fed meeting at the end of the month have been increasing. It appears the Fed is not looking to change its stance on the basis of the next CPI report.
Goldman Sachs on Wednesday raised its Fed forecast to a three-quarter percentage point hike in September, a 50 basis point hike in November and a 25 basis point hike in December. Goldman is expecting a more hawkish Fed even though it is pretty certain CPI will cool off.
If you are looking to trade into this news flow, then the most important thing you can do is to keep the trades tight and not let a short-term trade turn into a longer-term investment if it goes against you. The way most traders get into trouble in a bear market is by trying to catch turns and then sticking with positions that go the wrong way.
As far as position trades, most charts still need much work. There will be sectors such as solar energy that are working, but then other sectors such as oil are already going in the wrong direction. You simply do not find many good intermediate-term charts right now.
We have a flattish open on the way. Weekly unemployment claims will be reported and that may generate a little response, but we will see if there is better dip-buying after the rebound on Wednesday.
