Is This the Bounce We Have Been Expecting?

October 4, 2022
Author: Peter Stolcers, Founder of OneOption

Probably, but no need to chase. Be patient today. The price action will provide valuable clues.

PRE-OPEN MARKET COMMENTS TUESDAY – Yesterday the market gapped higher and it was able to hold the gains through the first two hours of trading. That is typically when the selling pressure surfaces and when any gains evaporate. As the day progressed the market was able to float higher and it erased some of the losses from last week. Overseas markets were strong and that is providing a nice backdrop this morning. The S&P 500 is up 60 points and it has traded above the high from last week.

What’s changed overnight? Nothing. The market does not go straight down and we are due for an oversold bounce. Beginning of the month fund buying and earnings season next week is providing a bid to the market. There is a ton of cash on the sidelines looking for a home and the market is typically strong into year end.

How high will the market bounce? How long will the bounce last? We don’t know. As the move unfolds we will be able to tell from the price action. The height and duration of the bounce will also provide valuable information about the state of the bear trend because it will reveal how aggressive buyers/sellers are.

Yesterday I mentioned that credit issues are surfacing. That has not improved and it won’t for many months (if then).

Inflation is running hot and Fed officials have warned that it is not going away anytime soon. We might have some relief in food and energy prices, but it is deep seeded. Apartment rentals are sky high, mortgage interest is high and services are expensive (wage inflation).

Signs of a global economic recession are surfacing. Global shipping rates are down 75% Y/Y and dozens of routes on the busiest channels are being cancelled during the peak season. Retailers are cancelling orders to reduce inventory.

Yesterday ISM manufacturing barely stayed in expansion territory (50.9). Tomorrow we will get ISM services and the ADP report. I am expecting a solid jobs report Friday based on the low level of initial jobless claims the last 4 weeks.

Earnings season will begin in 10 days. Typically we see a decent market bid into the releases.

With all of the fundamental dark clouds I doubt there is a single Asset Manager who will feels as though this is their last chance to buy stocks at this level.

An overnight bounce of this magnitude is NOT likely to completely reverse. If it does, look out below. I also feel that a “gap and go” is NOT worth chasing. Stacked green candles with little to no overlap in the first 30 minutes would reveal this pattern and it would lead to a bullish trend day. A more likely scenario is a gradual drift lower that fills in some of the gap. We are already seeing some of the overnight gains retrace so I am expecting some selling pressure. If the move has some nice red candles stacked, the bounce will not be that strong and we need to wait for support to be established. We want at least half of the gap preserved and SPY$370 needs to hold. Then wait for a bullish 1OP cross. If the move lower has mixed overlapping candles, it will be a sign that buyers are interested. The market will find support in the first hour and that will give us a chance to find stocks with relative strength. If this unfolds we will get back to the overnight high and we should be able to test SPY $374.

Support is at SPY $368 and resistance is at $374.

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