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S&P500 and the SPY Setting Up a Dead Cat Bounce Into the Holidays

Most indicators and sentiment readings are severely oversold, setting up a dead cat bounce for stocks, the indices and the S&P 500 (SPY). All sectors sold off on Monday leading us to believe a relief rally into the FED meeting might be in the cards. Thursday will be a tell.

S&P 500 – SPY

Presumably, the descending channel will hold today, as futures point to a gap higher to start the Tuesday morning session. Five weeks of distribution precede these last two weeks of December.


SPY Tuesday 12-18-2018


Momentum is clearly with the bears, so any bounce would need to be convincing enough to reverse the current AAII readings (48% bears) leading into the holidays.

All things considered, shorts have been working the best. Hedges in bonds (AGG, IEF, TLT) and inverse index funds (SQQQ, SPXU, SDOQ) have helped cushion the pullback for those looking to protect their portfolios while remaining patient.

Sidenote: Johnson & Johnson (JNJ)

JNJ has been a stalwart since the summer. At that time the stock broke its downtrend. Last Friday Reuters published a story that the company knew about potential asbestos in its talc. The stock broke below its 50d and bounced near the 200d. Monday saw the stock drop below this key long-term moving average leading us to believe many institutions are captive (-14.75%) below its 52-week. All of this happened in 3 days.

Thus, we felt the double bottom at S1 on Monday presented an opportunity to take profits on puts that @leestar mentioned on Friday and set up a short-term long in the stock. We assume those institutions that still want to exit will do so over the next few days. Trailing stops will be moved higher today. as the stock (+5.30 > S1) is trading (+2.69%) in the pre-market session.

A similar example can be seen on Facebook (FB). After its late-July earnings report was met by disappointed investors, a dead cat bounce followed the gap down. After the initial drop, institutions most likely were looking to exit on any short-term strength.



JNJ might follow this pattern if institutions are still unconvinced. JNJ could see Phase IV build just like FB experienced these past four (4) months. For more on Phases, check out my book.

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