Stay Long SPY – Here Is Your Stop

October 27, 2022
Author: Peter Stolcers, Founder of OneOption
Author
Pete

As long as this breakout holds, stay in the swing position.

PRE-OPEN MARKET COMMENTS THURSDAY – The market rallied above technical resistance at SPY $380 this week in anticipation of strong tech earnings. That level has been resilient even after negative reactions to MSFT, GOOG and META. After the close today we will hear from AAPL and AMZN. If these reactions are negative it will be difficult for the market to hold the breakout. Traders will brace for another interest rate hike next week.

Corporations are poised to buy back $1.1T this year and buybacks will keep a bid to the market. They are expected to hit $5B per day in November when they come out of the blackout period. This will keep a bid to the market.

There is a ton of cash on the sidelines waiting to be deployed and the next two weeks are historically the most bullish weeks of the year. This pattern exists because the market bounces from deeply oversold conditions in September/October. Once mega cap tech stocks report, the air will be let out of the balloon. If the market can’t get off the deck in the next two weeks, it will be a warning sign.

Asset Managers do not care if they make or lose money (no matter what they tell you). They only care about outperforming peers and benchmarks. This is how they attract new money. They can’t buy bonds because they continue to drop and cash is a losing proposition with inflation stripping away purchasing power. If they feel that this is a good time to deploy cash, the market will stage a bounce. As it gains traction, under-allocated Asset Managers will get FOMO. In my 30 years of trading, I have an axiom. “Never short the market in November and December (no matter how nasty things look).” I don’t have to buy, but I can’t short. That rule has made me a lot of money and it has saved me from making some big mistakes.

The global backdrop is bearish and there are many signs that economic growth is deteriorating. Some of the largest sovereigns are supporting their bond market and currencies. Central bank intervention is never a positive.

This morning GDP and durable goods orders were better than expected. The price deflator came in a 4.1% and that was lower than feared. The Fed uses this to gauge inflation. Initial jobless claims came in at 217K and employment in the US remains strong.

Swing traders are long SPY at the open yesterday ($379) and you should stop the trade out if the SPY closes below $379 (check it in the last 5 minutes of trading). That level needs to hold. I am in “plug your nose and buy” mode as long as that technical level holds.

Day traders need to expect lots of two-sided price action. Don’t marry one side or the other and don’t overstay your welcome. There are big intraday price swings and we can expect that to continue ahead of major earnings announcements and the FOMC next week. Personally, I like trading from the long side. Many stocks have been trashed this year and they are breaking through downward sloping trend lines. The price action has been much steadier on the long side and these stocks have room to run.  

Don’t get bogged down on what you think should be happening. I can make an equally compelling case for a rally or a drop and so can other traders. Focus on what is in front of you and don’t try to dissect why the move is unfolding. Go with the flow!

Support is at $380 and resistance is $387.50.

The SPY needs to hold $380.


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