SPY and QQQ gapped down on Thursday, with SPY dropping into the gap it left on Monday and QQQ, the stronger index at the moment thanks to the Trillion Dollar Titans and AI catching rotation, gapping into the 50% retrace of its Monday candle. Both names got bought up pretty hard, and both eventually filled their retest gaps, closing basically flat on the day.
SPY Daily Chart
Todays price action shows us that the bulls are still showing up where they need to, but the weakness also tells us that we might not be out of the choppy woods just yet. If you have read any of my latest newsletters, you know that I am expecting some form of drawdown over the next 6 to 8 weeks. The reason is pretty simple. That is exactly what happened during the prior six rate hike regimes over the last 30 years.
The drawdowns varied in size, with 2022 being the largest, but every one of those periods saw at least a 10% drawdown from the all-time highs. What is also interesting is that all of these rate hike regimes started when SPY was already off its highs. Only once, in 1999, did SPY push into new all-time highs before eventually dropping lower and correcting.
Either way, the seasonality, the rate hikes, and the wave counts all lead me to believe that we could have some volatility coming our way.
What I find really interesting about the six different periods where the market dropped at the start of a rate hike regime is how good of a buying opportunity each one created.
It is always possible that we get another 2022-style bear market, but based on what I am seeing right now, I view that as a lower probability scenario. My expectation is that we stay within the average historical drawdown, possibly even less. On SPY, that could take us down toward the 200-day SMA, and potentially even toward the prior all-time high around $700 if we really get lucky.
I say “lucky” when talking about a deeper drop because once things start breaking down below key levels, I actually prefer to see the market sell off more aggressively. That gives me the opportunity to hedge, manage risk, and eventually buy great assets at nice discounts, especially when seasonality and historical data are on my side.
For now, I will treat a drop into October as a buying opportunity until key supports start breaking on the bigger time frames. Obviously, I will still mitigate risk along the way, but knowing what has historically come next after these types of drops should help keep me from panicking if we get some bearish price action.
The 2018 Analog
Another interesting historical comparison is the 2018 chart. This one is particularly interesting because it was Trump’s first midterm year.
You can see that we did not see the real selloff begin until October, and that decline actually lasted all the way into Christmas Day 2018. That ended up being one of the best buying opportunities of the last decade for traders who played it right and managed risk well enough to avoid getting stopped out of everything during the absolutely devastating December drop.
What is also interesting is that the 2018 decline was primarily caused by the Fed tightening aggressively. The Fed was hiking rates while also shrinking its balance sheet.
Sound familiar?
There are obviously some major differences between then and now. Oil, for example, was plummeting during that period, so this is not a perfect comparison. But just like many of the V-bottoms we have seen throughout history, the market eventually got a catalyst in the other direction.
In this case, Powell and the Fed reversed course, the hawkish rhetoric faded, and the market blasted off.
It is not impossible to see something similar happen this time around. We could see global liquidity tighten into Q4, causing a meaningful selloff, followed by another shift from the Fed that sparks the next V-bottom recovery.
It does not have to happen. But if it does, I will be ready.
SPY 2018 Analog
Bitcoin
Bitcoin also looks like it could see a drop to retest the past six weeks of price action.
So far, BTC dipped into the prior high around $82,700 and has bounced nicely. The 120-day SMA on the 3-day chart is now around $79,300 and continues to tick lower each week.
Again, I think it is possible for Bitcoin to break back below that key average during a larger retest and still remain in a bull market. As long as BTC holds the 200-day SMA and 100-day SMA, the bigger bullish structure remains intact in my view.
I plan on buying the dip in Bitcoin. Even though I am already long, a deeper move into the buy zone would actually be ideal because it would allow me to add at lower levels and build positions closer to my stops, where the risk-to-reward is most favorable.
My main buy zone is $76,000 to $71,000 if we get down there.
The deeper we go into that zone, the more interesting the setup becomes for me. I am not going to panic if we get a pullback, I will instead embrace it since I have already planned ahead and know the exact actions that I will take.
