The SPY is resting just above the 100-day MA. Here are my thoughts.
PRE-OPEN MARKET COMMENTS WEDNESDAY – Yesterday the market dropped below the upward sloping D1 trendline that started from the low of the year. The selling pressure was steady and the volume was decent. The 100-day MA was tested and it held. If that moving average fails, we can expect another round of selling today. The PPI Friday and the FOMC meeting last week has traders favoring the short side.
This is a fairly light news week and I did not expect the breakdown yesterday. It is rare to see back-to-back bearish trend days. The up trendline from the low of the year was easily breached and when the volume was better than average, the warning signs were clear. Be aware that we could see similar today if the 100-day MA is breached.
The bounce from the October low has been wimpy. Mixed overlapping candles on light volume told us that. We had a couple of news driven events (CPI and Fed Speak) that sparked short covering. We know that was short covering because there was no follow through buying. Typically the bid is strong this time of year, but not this year.
All of the “Fed speak” gains from last week have been stripped away and we have a clear rejection from the 200-day MA. There was nothing new in Powell’s statement and I’m not surprised. The longer term D1 down trendline is firmly intact.
Swing traders should stay in cash. If not for my self-imposed trading rules (no longer-term swing shorts in November and December), I would suggest shorting a close below the 100-day MA. I won’t violate that rule so we will watch from the sidelines. If you sold OTM bullish put spreads, I would close those down if the SPY finishes below the 100-day MA. It is not a foregone conclusion that it will fail. We could bounce off of it and stay in the range.
Day traders should monitor SPY $392.18. We are just above that level. If we take it out with ease on the first attempt, that would be bearish. That needs to happen on better than average volume. Reference the price action the last two days. In both cases we breached major technical support. If the candles are red with little to no retracement and the volume is heavy, this could be a bearish trend day. Look at the D1 SPY chart. How many streaks of 3 consecutive long red candles do you see? Not many. That means the odds of a bearish trend day today are small. Keep that perspective and know that institutions will try to lure shorts in on the open. Then they will slam the door shut. Only with the pattern I described above can we trade the short side with confidence. Make sure the selling pressure is steady; that the volume is heavy and that we break support with ease and stay below it. Trade with the understanding that this is NOT likely and you will know what to do.
We are in a news vacuum. I am expecting a day of rest and choppy action.
Support is at the 100-day MA and resistance is at $396.