Stuck In the Middle Again

December 6, 2022
Author: Peter Stolcers, Founder of OneOption

No follow through on the breakout. We are in wait and see mode again.

PRE-OPEN MARKET COMMENTS TUESDAY – Yesterday the S&P 500 tried to get back above the 200-day MA. It was smacked down and we are not seeing follow through buying after the big “Fed speak” rally last week. That is a sign that resistance is building.

ISM services came in much stronger than expected (56.5 v 52.5). Our economy is 80% service based so this was supportive of a “soft landing”. The market dropped on the news because the strong economic release paves the way for more rate hikes (good news is bad news). I’m not buying that. The Fed is not done raising rates and the impact of current rate hikes will not be seen for many months. The yield curve is inverted and economic growth will stumble. The market bounce is all “fluff” and that is why the market dropped.

All eyes are on the FOMC meeting next week. PPI will be released Friday and CPI will be released Tuesday.

There is some optimism that China will start to reopen and that has sparked a short covering rally in Chinese stocks. I still believe China is the weak link.

From a swing trading standpoint, I am not impressed with the quality of this year end bounce. Mixed overlapping candles are a sign of weak trend strength and the volume has been light. We have seen two news related rallies (CPI and Fed Speak) and there has been no follow through on those breakouts. The longer term down trend line is still intact so I prefer not to enter longer term swing trades at this time.

Day traders should expect some selling today. The rejection of the 200-day MA will weigh on the minds of traders and we will probe for support today. Don’t expect any fireworks today. The market is wedged between the 100-day MA and the 200-day MA. We are in wait and see mode again. There is an uptrend line that comes into play at the low from Monday. If we take that level out, we will test the 100-day MA. The market is flat pre-open so this could be a slow start to the day. Expect balanced two-sided trading. Be selective and reduce your trade size and trade count. Our best scenario is a breakdown below the low from Monday on HEAVY volume.

How do we know if there is going to be a trend day? At very least we need orderly price action (lots of consecutive candles of a single color), heavy volume and an early breach of the prior day’s range.

Support is at the low from Monday and resistance is at the 200-day MA.

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