Trading position (short-term; S&P 500 futures; my opinion): long positions (100% position size) with stop-loss at 3140 and initial upside target at 3550 are justified from the risk-reward perspective.

Meek and tame, the soft patch is here – at least according to the charts thus far. Will it stick being so, or are the bears readying a surprise? We're at that correction's stage where the bulls can still say enough is enough, and buy convincingly.

It's Thursday, and the weekly candle in progress has a noticeable upper knot already, and the volume is likely to surpass last week's one.

Ideally today or tomorrow, buying power should emerge to prevent further chart deterioration. How likely is that given the stimulus wrangling, European corona situation and lockdown fears?

Will my yesterday's words be proven right or wrong?

(…) Will it turn into a 10%+ correction, or worse? I highly doubt that. Can the digestion of sharp gains have a zigzag form (two waves down with one wave up in between)? It's possible, but it's still unlikely it would reach too far on the downside.

Yes, I look for a correction in time rather than in price. The Fed is slowly but surely stepping up to the plate, and the stimulus game of chicken is closer to its end than to its beginning. There is just simply too much going on in the rally's favor to derail it. Regardless of the declining put/call ratio, we're not in extreme greed – just your usual and not too elevated garden variety of it.

S&P 500 in the Short-Run

I’ll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):

The move to the downside has accelerated a little yesterday, but volume didn't pick up. Also, the decline's pace is nowhere near its rate at the beginning of September, which is making these situations not similar.

The bull flag can still materialize over the coming days. With measured price moves and volatility as low as yesterday, this scenario has more chances of materializing than not.

Such were my yesterday's observations on the bears:

(…) Unless they start acting courageously, the correction won't get far. Seeing the opening shot in the charts, I am not looking for the consolidation to reach out really far to the downside.

The confluence of 50-day moving average and the Feb highs, isn't all that far though - the bulls better step in earlier so that the bull flag theory remains intact.

Credit Markets’ Point of View

High yield corporate bonds (HYG ETF) keep being under pressure, and the volume examination isn't encouraging. I can't say yet it's a sign of accumulation – prices would have to reject the downswing e.g. by forming a long lower knot.

Medium-term Treasuries (IEI ETF) have recovered lately, but the swing structure doesn't attest to a flight to safety.

Similarly in long-term Treasuries (TLT ETF), there has not been any panic buying to speak of. These instruments even turned lower intraday, which is telling for the days to come. Perhaps not yet for today, but this upswing is at a lower high than it was in September.

Both leading credit market ratios – high yield corporate bonds to short-term Treasuries (HYG:SHY) and investment grade corporate bonds to longer-dated Treasuries (LQD:IEI) – are ticking lower, with the more risk-on one leading the way. Should LQD:IEI join in the decline with equal conviction as HYG:SHY, that would be worrying.

Market Breadth, Force Index and Bollinger Band Width

Despite yesterday's downswing, the advance-decline line has ticked higher. Much more obviously needs to happen, it's a gentle sign that the sellers weren't as strong yesterday.

The Force index hasn't left the positive territory, and the question remains whether we would see it mostly keeping above the zero line, or whether a deeper plunge below it would happen – and last for a while. I don't think we would see September repeating.

Summary

Summing up, the soft patch is picking up some speed, and stocks are under pressure currently. Smallcaps though aren't taking a plunge, faster and on really higher volume. I'm keeping an eye on the credit markets for signs that this selling pressure is abating and that the bull flag remains intact. The coming sessions would be telling, and if commodities are anything to go by, then the stock downswing is likely to run into headwinds soon.

Trading position (short-term; S&P 500 futures; my opinion): long positions (100% position size) with stop-loss at 3140 and initial upside target at 3550 are justified from the risk-reward perspective.

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.