How Should I Trade This Monster SPY Move?

November 10, 2022
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Take a deep breath and know that you are in control.

PRE-OPEN MARKET COMMENTS THURSDAY – The election results point to a Republican House and control of the Senate will require a run-off in Georgia. In general, investors prefer a balance of power and that outcome is likely.

The market is focused on the CPI this morning. Consumer prices increased .4% and the S&P 500 rallied more than 100 points on the news. This is going to give the Fed breathing room and we have “Fed speak” today. Look for brisk trading.

The last two months of the year have incredible seasonal strength. If Asset Managers gain confidence they are going to put that mountain of cash (21-year high) to work. If the move is sustained, we could even see some FOMO as they try to catch up. It is way too early to tell if this scenario is going to play out. Below I have included a chart of the SPY. When it does not rally into year end, it is a bearish sign for the year ahead. These last two months are crucial.

Longer term swing traders need to remain sidelined until the SPY breaks the D1 down trend line and the 100-day MA. If the SPY closes above $390 on heavy volume (key word) we will buy. Let’s see what the day brings. I will keep you posted.  

Day traders should watch the early action. I can’t advocate chasing a 100-point gap higher. Typically moves of this magnitude hold. There will be an incredible amount of short covering early. The CPI has had follow through in the direction of the initial reaction the last 5 times. Let the short covering run its course and look for strong stocks that are breaking down trend lines to the upside on heavy volume. Tech has been battered by higher interest rates. The possibility of a Fed pause will spark buying in that sector. Chasing an early gap up is dangerous. You are vulnerable to a gap reversal in a longer term bear market. If we get a decent drift lower, consider it a gift. Wait for signs of support and look for stocks that are grinding higher when the market is retracing. These stocks have relative strength and they will provide you with some cushion if you entered too early and the market continues lower. If the market grinds higher and it never retraces, don’t worry that you missed the move. A massive rally on heavy volume will present longer term swing trading opportunities. When we see that price action we will be able to take those trades with confidence and that is how we will make our money. This needs to be your mental mindset today!

One data point does not make a trend. I doubt that Fed officials are going to capitulate instantly so the “Fed speak” today might not give investors the “warm fuzzy” they seek. Secondly, much of the early price action is short covering based on how traders were positioned. Much of the early volume will be due to adjustments rather than bona-fide buying. Remember that you are in control, not the market. If you miss some of this move… so what. If it is the “real deal” we will make a ton of money in the next week without lunging.

Support is at the 50-day MA and the low from Monday. Resistance is the 100-day MA.

If we do not get a nice year-end rally it will bode poorly for 2023

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