How Head Fake Moves Work In The Stock Market


The winds and the waves are always on the side of the ablest navigators.
-- Edward Gibbon


Despite closing modestly lower on the week (relative to the previous week), the volatility over the past five trading days told a much different story as the benchmark indices posted some of its best and worst days since 2020, this week. The week started out promising with three straight positive sessions (including a strong rally after the FOMC announced the expected 50 basis point increase on Wednesday 5/4), but subsequently, fell apart on Thursday and Friday on concerns that the Fed may not be able to orchestrate as soft a landing as they [and the market] hope.
In the news, the 10-year U.S. Treasury yield rose above 3% for the first time since December 2018 as the Fed raised interest rates by 50bp (its steepest rate increase since May 2000) and said that it would aggressively shrink its balance sheet to fight inflation, Elon Musk said he plans to take Twitter public a few years after he takes it private (and will also serve as its interim CEO), Airbnb posted a strong rebound, Didi became a penny stock (below $2), Warren Buffett and Peter Thiel have found themselves in a feud over the value of crypto, the EC unveiled new sanctions on Russian energy, including a phase-out of crude imports within six months, and in a rare breach of tradition and secrecy, the U.S. Supreme Court voted to strike down the landmark Roe v. Wade decision.
For the week, the Dow fell 0.2% (its 6th straight declining week), the S&P 500 lost 0.2%, while the Nasdaq Composite dropped 1.5%.

Monthly Chart [Clean]

At first glance the monthly suggests the next level of major support is around the $76.50 level.  While we may see support come in sooner, history suggests the market will test prices down to previous resistance.

Weekly Chart [with TAOST Swing Power Zones]

SPXL put in a Double Top against a lower high on the weekly chart since rolling over at the beginning of 2022.  The action over the last 2 weeks finally took us through the February low at $90.54 [which was also support running back to May of 2021.

Daily  Chart [with Taost Power Zones & annotations]

Last Wednesday's FOMC induced head fake rally shook a lot of traders out of their short positions.  Of course, the smart money laid out new shorts [or added to existing positions] as price approached resistance near previous highs in the Balance Zone into the end of the day on Wednesday.  They were rewarded instantly on Thursday as prices collapsed and gave up the rally from the beginning of the week

The Simple Point

As ever the overall stock market moves in waves just like the ocean.  Major waves to minor ripples and everything in between. You can "predict" the near term direction of a wave by just looking at it.  And that predictive capacity is enhanced by a deep understanding of the impact of internal drivers... weather, wind, and lunar cycles in the case of ocean waves... fundamentals, interest rates, news flow and other drivers of trader perception in the case of freely traded markets.  

In other words, context.

So what would I do here?  

I'd be a seller of rallies unless and until price can rally convincingly above the Exponential Moving Average Channel.  You might be tempted to try to buy this market that's "on sale."  I too believe that the US stock market will ultimately find it's way higher... ultimately.  But as a short term trader, I'm much more interested in sailing with the wind at my back versus sailing into a gale force wind.

Trade well.


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