Here's My Approach to Trading This Market Right Now

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After a brutal week of selling, stocks are attempting an oversold bounce on Tuesday. Traders that were looking for some relief last week were trapped a couple of times in bounce attempts that failed.

On Friday, the market celebrated the August jobs report, which showed that the unemployment rate has risen, but there also was the creation of a substantial number of new jobs. It was hailed as a “Goldilocks report” by some pundits, but the action fizzled out at midday, and there was steady selling into the close.

This action left the S&P 500 with its lowest close since July 26, and there was notable technical damage as all of the indexes are now back under their 50-day simple moving averages. The rally that was celebrated in mid-August is now being viewed as just a very energetic bear market bounce and not a major low.

There is bounce action early on Tuesday as oil and energy stocks are running hot on the Russian shutdown of a natural gas pipeline and the potential for supply cuts in the Middle East. Oil has been under steady pressure in large part due to concerns that economic slowing will cut demand, but the supply problems are not going away, and the fall in demand may not be enough to solve the problem.

At this juncture, there isn’t any good reason to trust an oversold bounce to last very long. The question, however, is whether it is tradable or not. Counter-trend moves can be sizable, but this market has a tremendous amount of overhead resistance right now, and sellers and shorts will be lined up to sell into strength at some point.

There isn’t any major economic news coming this week, but the very important CPI report is due next Tuesday and will be a market mover. It will provide some clue as to whether the Fed’s hawkishness is having an impact on inflation, although it is unlikely to be sufficient to cause a major pivot. Traders will be debating all week whether the Fed may start to relent a little if CPI softens, but the problem is that Fed Chair Powell and most Fed members have made it clear that rate hikes are coming even if there are some more friendly economic reports.

My approach to the market right now is to maintain very high levels of cash, look for some short-term trades, and be highly selective about any long-term buying. I see no reason to tie up capital in hopes that I might be catching a stock near its low. I prefer to buy long-term positions when I think they are ready for a sustained uptrend. Whether I buy the low or not is unimportant. I want to catch a positive trend.

The early bounce action is gaining further traction as I write, and we’ll see if it causes a little FOMO to develop.