Follow Path Of Least Resistance In Wild Market


Simpler Trading Team

Mar 01st 2023  .  5 min read

What is the path of least resistance for direction up or down in this market?

And how do you determine that path?

The stock market slumped on the first day of the month and the Simpler Team is playing the path the market is giving through the end of the week.

Options with Bruce Marshall
Futures with Neil Yeager

Sell signals continue across broader market

The stock market isn’t showing strength heading into March, seasonally a rebound month after a lull in February.

“Until the bulls really step up to the plate it continues to look like it will be easier for the market to go lower than go higher,” said Taylor Horton, Vice President of Directional Options Strategies at Simpler Trading. “The bulls are not ready to run just yet.”

Taylor is seeing more sell signals across the major indexes and throughout leading stocks. He daily watches the S&P 500 (SPX) and uses technical chart analysis to track down potential trades.

He pointed out that most SPX time frames are showing sell signals. He breaks down the bigger picture in the market and on the SPX chart by reviewing lower time frames such as the 1-, 3-, 5-, 15- and 30-minute charts.

“I don’t think it’s a market where you want to get too caught up in the scans or individual stocks,” Taylor said. “I’m thinking the market is in a pretty vulnerable spot.”

Bears could take firm control of downtrend

Traders may not realize how much of a downtrend the stock market has been in for some time.

The year started with a sizable rally in early January, but has since been in a downtrend that has eliminated most of that momentum.

Taylor showed how, when looking at the SPX daily chart, that price is under the daily 21-day exponential moving average (EMA), the 50-day simple moving average (SMA) and the 200-day SMA. And a daily squeeze short has fired on the SPX daily chart.

“There is a little bit of pressure here,” Taylor said. “We’ve broken structure and momentum and we went through a compression phase going into a squeeze.”

Current market conditions may be setting up a scenario where the bears take firm control.

“If the bulls don’t fight and scratch and claw we could be in for a pretty big flush,” Taylor said.

‘Dixie’ down, but showing strong uptick signs

Taylor is seeing strong signals that the bearish conditions will continue.

He pointed to the U.S. Dollar Index (DXY), or “dixie” as some traders call it, holding strong and showing buy signals across time frames.

“The dixie continues to be locked and loaded,” Taylor said. “The dollar is not taking as big of a chill pill as I think you’d like to see if you are looking for the market to trade higher.”

Generally a higher dollar means lower prices in equities. The dollar was down today by .44% and closed at $104.41.

By contrast in the market today the Dow closed at 32,661.84 points to eke out a .02% gain (adding just 5.14 points on the day). The Nasdaq dropped to 11,379.48 points for a .66% slide while the S&P 500 notched a .47% loss down to 3,951.39 points.

“Finally for the first time in a while the dollar is moving and grooving,” Taylor said. “Trend, structure, momentum – everything is currently lined up for the path of least resistance to the upside.”

As stated, a dollar moving higher is generally a sign the market is headed lower.

The dollar is still off its previous high of $114 in October, so Taylor is cautious about where the dixie ends up the rest of the week.

“It’s a little bit of a hurry up and wait for now,” Taylor said. “Continue to keep an eye on the dixie.”

Another internal market signal Taylor watches is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), commonly referred to as “junk bonds” by traders. He isn’t seeing buy signals for HYG or anything suggesting the bottom is in for this chart.

Taylor doesn’t plan to go against the path the market is revealing.

“As far as it all sits right now, the HYG has nothing but sell signals, the dollar has nothing but buy signals and the SPX has nothing but sell signals,” Taylor said.

Bulls not out but upside chances fading

Taylor is not one to discount bullish possibilities in this market environment.

He is watching to see if the S&P 500 can get back above 4,000 and above the hourly 50-day SMA. Coupled with lower time frames turning bullish, that could be an upside indicator.

“That might set the market up here for a pretty good pop,” Taylor said.

But any bullish outlook comes with a strong caution.

“Before you go looking for bullish exposure in this market, look for signs of an uptrend on your lower time frames,” Taylor said.

He noted that the path of least resistance appears to be to the downside, according to chart signals.

“This doesn’t mean the bulls don’t have a chance,” Taylor said. “It’s just a matter of if they can clean up and take control of the wheel.”

Looking ahead to the next few days Taylor will watch for confirmation of any trade setups by reviewing charts from “the ground up” – following signals on the lower time frames.

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