I have harped over and over how bearish I am on the market and I assure you I am only emboldened after yesterday’s action. It was a great day for bears not only because of the large downward movement, but there are key levels that have been noted here which have now been broken.
This chart is very similar to the one I posted over the weekend, but updated for yesterday’s action. I want to highlight first the trendline from the June lows. This trendline was broken after the inflation numbers last week (spot 1). It then consolidated beneath previous horizontal support of 3900 and chopped around, attempting to hold the very important trendline from the COVID lows in 2020 (spot 2). After yesterday’s action, we finally broke this trendline.
This trendline was the last bastion of short-term bullish potential as I see it. A reversal bounce here would have surely sent this back up over 4k to test that descending trendline from the market peak. Thankfully yesterday put the kibosh on this scenario. We headed straight down through this trendline into horizontal potential support zone at 3790. I drew this horizontal line as it did prove to be an important zone in late June-July (see choppy action, flip-flopping support/resistance at spot 3). I don’t think this drop is done by a damn sight.
But this is nothing new from me. So why am I repeating myself (sorry if you’re tired of hearing it)? This is because we are entering a new phase of this bear market. At this stage, bulls are finally (FINALLY) on their back feet. I expect changes in overall attitudes by the general investing public. Up until now, we have heard throughout this whole year how we should be “buying the dip”, are in “deep value territory”, “Hodl”, or some other bullish mantra.
To be sure, there were moments of blissful pure bearishness (April-May), but those were short-lived and the market bulls quickly turned their bullish machines back on as soon as they could. However, “this time is different”. This time, we have seen several potential bullish setups fail, not the least of which is the base and breakout from June-July. Young bullish investors don’t understand what is happening and don’t know what to do. Older bullish investors are getting scared. There will be a change in the market mentality from “growth potential” to “capital preservation”.
So the next best move from a trader’s perspective is to change targets. This year, the bear market was one led downward by tech as this was the most overvalued sector. Now that bulls are getting scared I suspect that the next wave of companies to get their stocks targeted will be growth stocks. SPACS are already known as poison. Crypto is practically synonymous with the tech world and can be viewed as “growth” stocks anyway. Any stocks with sky high P/E ratios will be seen more and more as an unnecessary gamble and too risky. So I am watching those high P/E stocks and looking for some reality to set in. On the flipside, blue chips may get hit but are more likely to withstand the drawdown we are seeing.
For the sake of research, I did find MarketBeat.com had a list of companies by P/E Ratio. At the top of the list is “DataDog” with a P/E ratio of over 9,000. It seems to have been doing well for itself as it has beat on revenues since 2018, but it has yet to show actual positive earnings. These companies tend to thrive just fine in bull markets, but with no earnings it is hard to survive that long. I recommend to do some due diligence to find some growth stocks ripe for a fall. Best of luck all.