Posted 9:30 AM ET – There was not any incremental news to justify the big rally Thursday. The market has been finding support at the 100-day MA and buyers want to own stocks into earnings season. Technically the S&P 500 was able to break through the downward sloping trend line and it closed above the 50-day MA. This morning the S&P 500 is up 20 points before the open.
The same market forces that were in play early in the week are still present.
Reasons to be bullish:
1. Interest rates are not keeping pace with inflation (negative real returns) so investors see stocks as an attractive investment alternative.
2. Corporate buy backs are steady.
3. The long term trend is up and the market formed a base at the 100-day MA.
4. We are heading into a seasonally strong period.
Reasons to be bearish:
1. Stock valuations have not been this high since the 2000 tech bubble.
2. The Fed may start tapering in November.
3. Hourly wages are rising quickly and this will bite into profit margins.
4. Raw material costs are rising quickly and that is inflationary.
5. Global economic growth is sluggish because of supply disruptions.
6. Electricity is being rationed around the globe due to energy supply issues.
7. China is seeing a rise in corporate defaults. This could spark credit concerns.
8. Analysts are downgrading earnings expectations at a fast clip.
9. This is the heaviest selling we have seen in a year.
The market is priced for perfection and as you can see from the list above, this is NOT a perfect backdrop. These are very strong opposing forces and I believe we will see sideways trading in a wide range.
Swing traders do not need to chase this opening gap higher. I believe there will be chances to buy. I suggest selling out of the money bullish put spreads on strong stocks. Don’t go crazy; just dip your toe in the water. This strategy will allow you to distance yourself from the action and to take advantage of time decay. Sell the spreads below technical support. If the market is able to hold the gains from yesterday for a few more days, you can add to your bullish put spread positions.
Day traders need to be careful on the open. Back-to-back “gap and go” formations are pretty rare. That means that if I am patient on the open today I should have at minimum a compression in the first 30 minutes and at best a dip that fills in much of the overnight gap. That will give me lots of time to look for stocks with relative strength, heavy volume and technical breakouts.
In the unlikely event that we have a “gap and go” early – I will not buy. I will be looking for an opportunity to short when that move runs out of steam. We have seen the heaviest selling pressure in a year and those forces are still in play. I am not bearish, I will just be looking for a round of profit taking if I see a “gap and go” right out of the gate. Once that drop finds support, I will be looking to buy stocks with relative strength. For those traders who do not like to short, don’t chase a “gap and go” spike on the open. Stay in cash and as the market comes in, search for stocks that are holding up well.
The underlying theme for this morning is to be patient and to wait for your buying opportunity. A “gap and go” in the first 30 min would simply set up a quick short for nimble traders. I will short futures and not stock because I can get in and out quickly.
Stay fluid and know that the opposing market forces are strong. We will see two-sided price action today.
Support is at the 50-day MA. Resistance is at $445 and the 50-day MA.