Posted 9:30 Am ET – My comments from Tuesday have not changed much, but we do have new information. Bull markets die hard, especially when they have lasted more than a decade. The S&P 500 found support just above the 100-day MA and that is a sign that buyers are engaged ahead of earnings season. We saw a similar bullish hammer on December 20th and the market shot higher from that level. Swing traders should have been selling out of the money bullish put spreads for the last week per my comments and you should be fully allocated.
The CPI was a potential speedbump. It increased .6% (.5% expected) and as I mentioned yesterday, previous “hot” inflation readings have resulted in very short term market dips. We were prepared to take a little heat on our positions, but we had plenty of breathing room because we were selling out of the money bullish put spreads. The initial reaction to the CPI was bullish and the SPY rallied on the news.
As long as the Fed has not started to tighten, the market bid will remain strong. The next FOMC meeting is 2 weeks away so we still have time.
The focus is on earnings and they start Friday with JPM. Banks will dominate the early releases. They will benefit from a rising yield environment and I am expecting a decent reaction. Mega cap tech stocks will be in focus and the earnings have been stellar. Consequently, I feel that the bid will remain strong until they post. They will finish reporting during the FOMC meeting so that is an important date to mark on your calendar.
Swing traders, should have their target allocation for bullish put spreads. If you picked the strongest stocks and you sold them below major technical support levels you will be in great shape. The put spreads will expire before the earnings announcements and if you have been focusing on the Option Stalker “Buy Into Earnings” search you know these stocks like to rally into the number.
Day traders, the market tailwind is at our back. The market bounced off of the 100-day MA and it is above the 50-day MA. Focus on the long side. The SPY is up after the release and I do not like to chase. The number was “hot” and that is bearish. Our ideal set up is a dip to the 50-day MA, but I do not feel we are going to see that level of retracement (30 point S&P drop). This scenario although favorable is unlikely (10%). A sluggish retracement with mixed overlapping candles would be our next best scenario because we have time to find stocks with relative strength. I do not feel we will get down to SPY $468, but that is another support level (20%). I believe the best we can hope for is a flat to slightly lower open with support at $469 (40%). We could also spend very little time probing for support and then start grinding higher right away (20%). Only a 10% chance of stacked green candles and I would not chase. Any decent drop of 10+ S&P points would be welcome since it will improve our entry point. TLT rallied on the CPI number and that is good for tech. Mega cap tech stocks also tend to rally into earnings. The D1 charts are weak, but the price action the last two days has been strong. This is where I will look for my day trades.
Support is $469 and the 50-day MA. Resistance is at $476.