I do believe that as long as monetary policy is set to be tightened, you have to look at rallies like this as potential selling opportunities.

The S&P 500 initially shot higher in the futures market on Monday but has given back the initial gains to form a shooting star. The daily candlestick does suggest that perhaps there are some selling pressure to come, but at this point, it would simply be a continuation of the overall downtrend. There has been nothing substantially different about the macroeconomic background to change the attitude of traders, and this rally is probably not long for this world.

If we break down below the bottom of the candlestick for Monday, I anticipate that a quick move to the 3800 level could be in store. Keep in mind that as we get closer to the end of the week there may be the “end of the month rebalancing” that you see at times, which can be somewhat noisy. Because of this, even if we break above the highs of the day on Monday, I still think that the upside is somewhat limited. The 4000 level would be the first area I would anticipate seeing trouble act, right along with the 50-day EMA which is sitting there as well.

It is not until we break above the 4200 level that I would consider this trend changed. Even then, I would probably have to see what is going on in the fundamental picture to get overly bullish. Until the Federal Reserve reverses its course, the S&P 500 will still have a lot of negativity surrounding it. With that in mind, I do believe that as long as monetary policy is set to be tightened, you have to look at rallies like this as potential selling opportunities.

That being said, you do have to be cautious shorting markets, because there is the inevitable “short squeeze” like we had seen on Friday. Although it looks like at the end of the day Wall Street is trying to claw back some of the losses earlier in the session, the reality is momentum is starting to slip away from the market right now, and I think it’s probably only a matter of time before we drop again. I do not like this market, and I have no interest in buying it. If we can break down below the 3800 level, we will almost certainly try to break down through the bottom again.

You may need to pay attention to Asia, specifically the Nikkei 225, and how it behaves overnight to get an idea of how the DAX may behave.

The German DAX Index initially rallied on Tuesday to reach the €13,450 level before turning back around. By doing so, it suggests that we are going to continue to see negative pressure, especially as the dreaded “shooting star” formed by the end of the day. It’s worth noting that the most recent impulsive candles have all been red and that suggests that there is plenty of interest in selling.

That being said, we have bounced quite sufficiently from the €13,000 level to suggest that perhaps it is important, and there are buyers down there willing to defend it. If we break down below the €13,000 level, then it is likely that the DAX will break down rather significantly, perhaps reaching down to the €12,500 level. The German index will have a lot of the same issues that other indices have around the world right now, as there is a real concern about growth, or perhaps the lack thereof. With that in mind, feeding rallies continue to make sense, which is exactly what people did during the day.

The alternative scenario is if we turn around and take out the big massive red candlestick from Thursday of last week, meaning that we can break above the €13,750 level. If we do that, it would be a very positive turn of events, perhaps opening up a move to the €14,000 level where the 50-day EMA presently sets. I’m not looking for that move but would have to pay close attention to it if it does in fact occur. Keep in mind that the DAX should move right along with other indices around the world, so you may need to pay attention to Asia, specifically the Nikkei 225, and how it behaves overnight to get an idea of how the DAX may behave. Granted, it doesn’t have to follow it, but it gives you a good idea as to what the risk appetite is going to be around the world.

I do think eventually the sellers come back, so not looking for the market to end the downtrend anytime soon. Because of this, I’m simply looking for signs of exhaustion that I can sell into. Unfortunately, it happened much quicker than I would’ve thought so, therefore, I’m still looking for opportunities at this point. Ultimately, DAX is likely to continue falling.