Watch This Market Support Level

November 28, 2022
Author: Peter Stolcers, Founder of OneOption

This wimpy year-end bounce is vulnerable to profit taking.

PRE-OPEN MARKET COMMENTS MONDAY – I hope you all enjoyed time with friends and family over the long weekend. The narrative is largely unchanged. From a technical standpoint the SPY is resting between the 100-day MA and the 200-day MA and the volume is extremely light. Year-end seasonal strength has produced a wimpy little bounce that can quickly be reversed. As long as support at the 100-day MA holds, day trade from either side. If support at SPY $391 is breached, focus on the short side.

Bulls are leaning on seasonal strength, record cash levels, corporate stock buy backs, signs that inflation is slowing and steady job growth.

Bears are leaning on an inverted yield curve, reduced earnings expectations, a hawkish Fed and global economic contraction.

Nothing is as good or as dire as it seems so the market is compressing in a tight trading range.

The headlines over the weekend are: reserve requirement reduction in China (PBOC easing), minor relief fund for Chinese real estate developers, widespread Covid-19 in China with much of the country in lockdown, 6 million fewer iPhones due to factory shut downs in China, oil demand in China at lowest level in one year, GPU shipments down 10% q/q (25% y/y) and Q4 earnings estimates for S&P 500 at -2% y/y vs 9% growth expectations in June.    

This is a heavy week of economic releases. I am expecting solid job growth based on the initial jobless claims numbers the last few weeks. As long as the “soft landing” scenario remains intact, the market should be able to tread water. If domestic economic growth starts to slip, we will see a heavy dose of selling.

Swing traders need to stay sidelined. We caught a little of this bounce, but it has no follow through and the quality of the bounce is low. Volume is the missing ingredient. A wimpy year-end bounce tells me that sellers are nearby and that 2023 is likely to start on a sour note.

Day traders also need to be careful. The daily ranges have compressed and the volume is light. This is a low probability environment. Trade either side and focus on the stock. Heavy volume breakouts through technical levels and RS/RW are critically important. If you can find a couple of nice stocks for both directions, hanker down and wait for your window of opportunity. Overseas markets were weak and the SPY is going to breach the low from Wednesday. There is no need to rush into trades. The market is trapped between two moving averages and without volume, the chances of a breakout are slim. Don’t piss your capital away.

Given the overnight action, the best scenario is a wimpy bounce to start the day with mixed overlapping candles that can’t fill half of the gap. Watch for resistance during that bounce (bearish hammer, bearish engulf, tiny bodied candles) and use that time to find weak stocks. That will set up a good shorting opportunity.

Support is at the 100-day MA and resistance is at the 200-day MA.

The blue box represents a critical support level. If it fails we can expect a heavy round of selling.

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