The Overhead Supply Is Near
The phrase, "Overhead Supply", is one that I've used more over the past 6 weeks than any time I can remember. It's something that has been very clear to me when I go market by market all over the world, and more specifically here at home in the S&P500. For the most part I've been a bigger fan of selling into strength, rather than buying dips. The one exception was early last week when the major averages were retesting the August lows, or undercutting them in some cases. Momentum was putting in bullish divergences on multiple timeframes in many of the securities we follow so getting long for a tactical trade seemed like the best risk vs reward proposition at that time. That worked out well, but now what?
I think the overhead supply is currently too close for comfort for me to want to get aggressively long at this point. What was a good risk/reward opportunity on the long side just 10 days ago is no longer the case from where we stand today; far from it in fact. I think the S&P500 Futures are the cleanest example of why I'd rather be taking profits up here and lightening up than putting on new long positions.
Look at all of this support in S&Ps going back to the March and July lows. Once that broke, anyone who was left holding stocks was now on the wrong side of the trade. All of that former support, where buyers outweighed sellers, now turns into the opposite. The market proved to us, by breaking below support near the 2010-2020 levels, that the sellers there now outweigh the buyers. Since the, "Just please get me back to break even" crowd is sitting there waiting to sell to you, I would prefer to be a seller up here than a buyer:
Also look at how prices are trading below a downward sloping 200 day simple moving average. This is not characteristic of an uptrend. It's actually something we like to look for in downtrends. So we ask ourselves: Do we want to be selling into resistance in a downtrend? My answer is a clear yes.
We saw a nice bounce over the last 2 weeks, terrific. We're happy to see it. But I think it's now behind us and we need to move on. We want to be sellers up here.
What can change my mind moving forward? I think if we can hang out up here next week and not give back to much of this rally, that would be positive for sure. If we can stay above 1980, that would be awesome. It would give the market an opportunity to digest these gains and absorb some more of the overhead supply that is so obnoxiously clear in the chart above. Time is what is needed here in my opinion.
What can make things worse? If prices head down and retest the lows since August for a third time, I think that could be disastrous. The more times that a level is tested, the higher the likelihood that it breaks. If we get down there again in the near future, it would increase the chances of a fourth or even fifth test and eventual downside resolution. I actually think this is the higher probability outcome from where we stand today, but I'm keeping an open mind regardless. The market doesn't care what I think.
I'm a net seller up here. We'll keep reevaluating of course, but the risk/reward is no longer skewed in favor of the bulls.
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