Image Source: Pixabay

Stocks fell sharply on Tuesday, with the S&P 500 down more than 2% and the Nasdaq dropping 3%. These declines aren’t entirely unexpected, and some of the drop is due to the end-of-day surge we saw on Friday, driven by an end-of-month buy imbalance. By 10 a.m. today, the S&P 500 had erased all those Friday gains after gapping lower at the open. The drop created a significant gap from a bullish perspective, and its structure suggests it could quickly be filled. If you’re bearish on the market, being cautious is essential given this risk, precisely because of the straight-line drop at today’s open following that straight-line rally from Friday’s close.

From a bearish standpoint, if the index can gap below 5,500 today, it could fill the gap at 5,450, which opens the possibility for various outcomes to play out.

Structurally, the Nasdaq 100 had a similar gap opening, presenting the same opportunity for a gap fill. However, the Nasdaq has already broken through several support levels, making it look much weaker at this point compared to the S&P 500.​

Nvidia (NVDA) contributed significantly to today’s decline. Nvidia appears to be completing a diamond reversal pattern, a typically very bearish formation, but a return to that August 5 low can’t be ruled out. We’ll need to see how this pattern plays out. Additionally, there are headlines indicating that the Department of Justice has subpoenaed the company as part of an antitrust probe.

Broadcom (AVGO) is set to report results next week, and it appears to have broken a support level, which is not a positive sign for a company heading into earnings. The other concern is that the next level of support isn’t until around $130.

Meanwhile, the CDX high yield spread index was higher today, which helped to bring the small-cap IWM ETF lower by 3%. Remember, the IWM has a very strong correlation with the credit spread, so it is entirely possible for rates to fall and the IWM to fall, too, because spreads are widening. Perhaps the easiest thing to do is just watch the HYG; if the HYG is falling, the IWM will follow.

The USDCAD moved higher today as the U.S. dollar strengthened. Wednesday’s Bank of Canada meeting could significantly impact the direction of the USDCAD. We pay attention to the USDCAD because of its inverse relationship with the S&P 500. If the USDCAD is bottoming and moving higher, it could signal a short-term top in the S&P 500. Additionally, as I mentioned to members in a video on Friday, I was fortunate that despite the sharp drop in the USDCAD, the S&P 500 merely churned sideways—a rare occurrence. This could have been a significant clue that the rally had no real momentum, even as the Canadian dollar strengthened significantly against the U.S. dollar.

Sure enough, not only did the U.S. dollar strengthen today, but sellers also showed up, with S&P 500 futures contract volume surging from its August slumber.

As I mentioned a couple of weeks ago, I believe the “higher for longer” trade is over. While it may show signs of resurfacing occasionally, I think it’s primarily finished. We’ll see what tomorrow and the coming days bring, but things will only get more challenging incrementally from here.

More By This Author:

The S&P 500 Drops With Support Levels Now In Question
September Could Be Rough For The Market
The Market May Be In For A Jolt Of Reality This Week