Going Down the Hole

It is looking bleak out there.  Futures gapping down after breaking last week's lows and below the key SPX 4300 support level.  Next psychological support level is 4250, and there is a open gap at 4258.  With the September selloff, we've backtested some significant trading levels (4420, 4350, 4300).  If you get some real panic selling, 4200 could be tested, but that is where the market lingered for quite sometime in April and May, so there is strong support at that level.

For the positives, you are finally getting some heavy put buying, as the ISEE call/put index shows.  Not just one reading under 80, but 3 times over the past week:

 Despite Thursday's selling, VIX didn't break out to a new high, and it closed lower than Tuesday, when SPX was 50 points higher.  SPX has made a lower low and VIX has made a lower high. 

For the negatives, the hedge fund CTAs are still very long this market, as regression data from the HFR CTA Index with the SPX is highly correlated.  Also, you still have negative seasonal effects at this time of the year, with stock buyback blackout in effect for the next few weeks, and volatile October seasonal patterns.  Don't forget that going into this week, according to that popular Twitter poll I mentioned on Monday, the dip buyers were still too bullish.  This week has gone a long way towards changing that, so we'll have to see how the FinTwit crowd reacts after this week's selling. 

I am still long, and early, but have dry powder to scale in more longs at these levels.  This will be for a longer term swing trade.  The uptrend is intact, but this selloff gives me more confidence that 2022 will be the year the SPX goes into a topping phase. If we do recover to new all time highs later in the year, don't forget about the price action this September.  Like February 2007, March 2011, and August/October 2014, a sudden, and deep sharp drop from a well established uptrend is a warning sign that the uptrend phase of the market is getting closer to the end.