Is this sell off a buying opportunity?

I wish I knew. But let me try to answer this question based on the Science of Price Action trading rules.

S&P 500 sold off dramatically on Monday. But what makes the selling worse: it happened on the back of news emanating from China which can have an impact on the global economy especially commodities, and the market broke down below 50 dma.

Here’s S&P 500 daily chart

Trading Rule: When an index breaks one level of support, it finds support at the next level. It means a breakdown below 50 dma means decline to 100 day moving average. That’s what precisely happened yesterday.

The big question: Will S&P 500 take support at 100 dma. There is a Fed meeting happening right now and they will announce policy tomorrow which is expected to be dovish, and there is a likelihood that the market might rally from 100 dma. But here’s one trading rule that makes me nervous:

When an index/stock has strong support and it breaks down, then usually that support acts as a strong resistance.

What does this mean? It means any rally will find it hard to break above 50 dma i.e. 4435 +/- 15 points, which earlier acted as strong support. The breakdown has changed the short-term trend and the sentiment of the market.

The mood of the market has changed. There are lots of fundamental issues which the market ignored till now but it might start paying attention to them like Supply chain issues, cost inflation, shortages, and wage inflation. And above all, there is no doubt that there is an extended market and a small panic can cause an outsized correction.

The Big picture fundamentals have not changed and the market might correct to shake out complacency. At this point in time, I would not recommend any new buying and even call for booking profits/losses on any rally.

Here’s why

Trading Rule # 1: When in Doubt, Stay Out
Trading Rule # 2: If any Gap down Selling is driven by fundamental newsflow, then selling should never be ignored.

I can be wrong and that’s fine. I will change my opinion about the market if it starts showing evidence of stabilization. I hope that this market finds support at 200 dma which as of today stands at 4109 (See the chart above).

Recommendations:

1. Let us watch from the sidelines for few days. 
2. Have an open mind on what can happen next

Do let me know your thoughts on the above.

Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purposes. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers