This Is What I Expect the Market To Do Today. Context Is Critically Important To Your Trading Plan

Posted 9:30 AM ET - We are getting a heavy dose of economic news this week and so far it has little to no market impact. The jobs report and ISM services will be released Friday. Central bank money printing has forced investors to buy equities. All of this money has to go somewhere and bond yields don’t keep pace with inflation (negative real returns). In the last 25 years the S&P 500 has not had eight consecutive higher closes and if September closes higher it would break that record. September is a seasonally weak month and the headwinds will be strong. Many parts of the US are shutting down because of the spread of Covid. The economic news has been solid, but below expectations in the US. Today ADP reported that 374K new jobs were created in the private sector and that was much lighter than the 660K that was expected. Don’t worry; the Fed will save the day by keeping the printing presses rolling. Wednesday we learned that China’s Caixin PMI fell into contraction territory (49.2 vs 50.2 expected). No worries, this increases the odds that the PBOC will ease and China’s market finished in the green after the news. Stock valuations are lofty. The forward P/E on the S&P 500 is 21 and it has not been this high since the “tech bubble” in 2000. From a technical standpoint the S&P 500 is bumping up against the upper trend line that connects the highs on a weekly chart. This should attract profit takers and the candle bodies on the daily chart are tiny. In 2021 this pattern has been a warning sign and a swift drop has surfaced a week or two later. The 5 biggest tech companies comprise 25% of the S&P 500 and the rally has been narrowly based. The laggards are starting to move higher and that is also a sign that the rally is tired. Swing traders with a 3-4 week horizon should stay sidelined. This is a seasonally weak period and I believe risk is elevated. Day traders should wait for a compression or a pullback. Overseas markets were generally positive and that should provide a decent backdrop this morning. The last two days we have seen a steady round of selling late in the day. This means that you should expect two-sided action during the day and some of the pullbacks could be rather strong. Resistance at the all-time high is building and we should be trapped in a trading range ahead of the jobs report. Institutions will not place any big bets ahead of the number. Set passive targets and don’t expect much of a market tailwind. The holiday will also reduce trading volumes. So let me recap. 1. Tiny bodied candles. 2. Resistance at the all-time high. 3. Signs of selling the last two days. 4. Big economic number Friday. 5. Light pre-holiday volume. These are the puzzle pieces you MUST put together each day and this is what I mean by context. Your day trading game plan must adjust for these conditions. It means reduce your trade count and be selective. Reduce your size and set passive targets. Support is at SPY $445 and $450. Resistance is at $453. . .

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