Day Traders Need To Wait For Support Before Buying – Possible Gap Reversal

Posted 9:30 AM ET - PRE-OPEN MARKET COMMENTS MONDAY- Last week the market struggled to advance. The daily ranges have been tight and the volume has been light. This morning the S&P 500 is up 28 points before the open and this will be a nice breakout if the gains hold. President Trump fast-tracked a Coronavirus treatment by AstraZeneca. The positive news regarding treatments and vaccines is widespread. The rate of new cases is starting to decline and that is boosting investor confidence. My own personal observation is that people are wearing masks and they are trying to return to their normal lifestyles. Last week the FOMC minutes suggested that the economic recovery will be impeded by the second wave of the virus. Initial jobless claims were back above 1 million (1.1 million) and that is a warning sign. A stimulus bill is unlikely and small businesses will not get additional aid. The PPP has run out and we could see small business layoffs if consumers remain cautious. Earnings season has ended and profits were down 33%. A “V” recovery for profits in Q3 is priced in and that leaves room for disappointment. This week we will get durable goods orders and preliminary GDP. US/China trade relations are tenuous. The Phase 1 trade talks were suspended last week. Now it seems like they are currently “on” again. Investors are numb to news related to China trade negotiations. This is a very light news cycle and the path of least resistance points higher. The S&P 500 is trading at a current PE of 23 and by historical measures that is rich. Swing traders should remain in cash and wait for a dip. On a very short-term basis we have been selling a few out of the money bullish put spreads. Our risk exposure is light and we are focusing on stocks with strong support and relative strength. Light volume rallies are vulnerable to profit-taking and the recent gains can be stripped away very quickly. This is a low probability trading environment. Day traders should be cautious on the open. Gaps up to a new relative high often reverse. Once support is established we should be able to join the upward momentum at lower levels. Use the 1OP indicator as your guide on a five minute SPY chart. Wait for a deep trough and look for stocks with heavy volume and relative strength. Reduce your size and your trade count in this low probability environment. The dog days of summer will end in two weeks and normal trading conditions will resume after Labor Day. Support is at SPY $239.48 . .

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