“All the world’s a stage” and the stock market didn’t like the raising of the curtain on the next act of world events to start this week.

All three major indexes were down on the day as news hit the wires regarding another cryptocurrency bankruptcy, escalating military clashes in Europe, and unprecedented worker protests in China.

Add in higher than expected Black Friday retail sales as consumers thumbed their noses at inflation and the melancholy reaction by stock market participants sent tickers tumbling.

Bullish rally falters as bear market bites back

The holiday-shortened week that ushered in strong Black Friday sales saw all three major indexes close higher for the period. Expectations were for the positive action to continue as this week historically supports rallies through the end of the year.

History met reality on Monday as the Dow closed at 33,849.46 points to fall 1.45% (dropping 497.57 points on the day). The Nasdaq dropped to 11,049.50 points for a 1.58% tumble while the S&P 500 fell 1.54% to 3,964.02 points.

Federal Reserve (Fed) hints of lowering and slowing benchmark interest rates into next year weren’t enough to overcome the stark reality of current news events.

Market conditions are fraught with caution signals.

“The major thing for this week is to be aware of and appreciate the risk to reward being presented by the market,” said Sam Shames, Vice President of Options at Simpler Trading.

Sam noted that all indexes started the week at major resistance levels and the Volatility Index (VIX) near 20, which was positive for bullish momentum. Bullish sentiment faded with unfolding news reports, and the VIX – or “fear index” – was sharply higher by more than 8% on Monday.

“While almost all signals are still aligned for bulls, we do want to understand that strength is limited at these levels until we either see a deeper pullback in the hourly 50-day simple moving average (SMA) on the S&P 500 (SPX) hold or we see a confirmed breakout above daily 200-day SMA.”

Any rally higher last week must be taken into perspective with the overall momentum of the market, Sam explained.

“Remember that even on a continued bounce, the market would still have a pattern of lower lows and lower highs,” Sam said. “The biggest bounces happen in bear markets.”

He sees the market as presenting bullish movement that traders can follow.

“Whether we believe the rally is irrelevant or not, the setup is there for bulls to try for a year-end melt-up in the indexes,” Sam said. “We want to know our levels and continuously check our work on structure and momentum as days pass.”

With current market uncertainty, Sam encouraged traders to not focus too much in one area of the stock market.

“Be cautious in this moment of over positioning in one sector as now we are seeing rotation between losers and winners, and the previous winners may lag,” Sam said. “Know your edge – market success comes from specialization, not touching all the water.”

Sam has adapted his trading game plan based on what the market is delivering.

“Most everything remains aligned from indexes, to sectors, to internals, to peripheral

markets like the dollar and bonds for bulls to continue to try for a year-end melt-up,” Sam said.

He is watching what happens daily in news events and market movement.

“The news event calendar this week is peppered with many central bank speakers/decisions (across the world), and this increases the volatility day to day,” Sam said.

Fed Chairman Jerome Powell has a speech scheduled for Wednesday, which amps up anticipation of the Fed’s next move. There are also a variety of earnings reports set for this week, including in technology and retail. Add in economic reports such as the U.S. Consumer Confidence Index on Tuesday, U.S. Job Openings and Labor Turnover Survey (JOLTS) on Wednesday; Personal Consumption Expenditures (PCE) price index on Thursday; and U.S. nonfarm payroll employment numbers on Friday and traders will need to stay on top of market reactions.

“Be careful with unbridled bullishness this week and into December,” Sam said. “Everything is still aligned for bulls, but recognize the thin risk/reward dynamics at these levels. There are no sell signals, but there are signs to trail up stops and to shorten trade length and decrease size.”

“My bias for now will continue to be on shorter duration trades given these dynamics,” Sam said.

Traders need to watch economic data, Fed

As the market tumbled steadily Monday – the Dow was down more than 515 points heading into the close – traders need to stay focused on what might prompt the next move higher or lower.

“A close above the 200-day simple moving average would be constructive for the near-term prospects of the markets – particularly if it were to occur on above average volume,” said Mary Ellen McGonagle, Senior Managing Director of Equities at Simpler Trading. “Should we experience a pullback, the 10-day moving average is now the first area of possible support.”

Mary Ellen emphasized the importance of paying attention to what the Fed wants and avoiding any news event speed bumps this week.

“Last week’s relatively weak economic data coupled with remarks from the Federal Reserve that a slowdown in big rate hikes may be on the horizon, helped boost stocks amid a drop in interest rates,” Mary Ellen said.

As the Monday stock market session proved, this week will be difficult to navigate with ongoing current events unfolding and as highly impactful economic data is due to be released.

Mary Ellen is watching closely how core PCE numbers match with economists calling for a 5% increase over last year.

“This number is more closely watched by the Federal Reserve as it removes volatile food and energy prices to reveal a truer picture of inflation,” Mary Ellen said. “Fed Chair Powell has

repeatedly cited the need to lower employment so that wage pressures and hence spending, can be lowered to reduce inflation.”

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