May 6, 2020
Posted 9:30 AM ET - Yesterday the market gapped higher and it rose above resistance at SPY $288. The price action looked very bullish until the last hour of trading when sellers stripped away more than half of the gains. The market finished on its low of the day and it confirmed resistance at SPY $288. An overnight rally has gradually been giving up gains after a very weak ADP report this morning. I believe that the market will try to tread water for the next week or two, but that the selling pressure will increase as the economy struggles to recover. All of the economic releases have to be taken with a grain of salt. Many agencies are closed and businesses are not staffed so there's no one there to provide the data. I believe that most of the economic reports that have come out recently are grossly understated. ADP could be the exception because it processes payrolls for small and medium-sized businesses. It has its finger on the pulse of the economy and it knows exactly how many direct deposits it has made. This morning they reported that 20.2 million jobs were lost in the private sector during the month of April. Based on my observations in my own local area and my research I believe this to be accurate. I believe that the overall job loss could be in the neighborhood of 40 to 50 million people. The PPP stimulus plan will get people back on the job as soon as possible. Instead of paying unemployment benefits for workers to sit home, the government wants to pay them while they are at work even if they are not needed. This is a transfer payment from the government to workers and businesses are simply a conduit. We don't know if this plan will work because it's never been tried before. As workers return they will monitor business activity and they will gauge their job security to determine if they will be laid off as soon as the government stimulus runs out. I believe this evaluation will be happening across the entire nation and that consumption will be curbed until job security is confirmed. This will lead to a very sluggish recovery. As a society we are getting used to the idea of wearing masks and I believe the level of fear is high. When I look at people I sense a reluctance to jump right back in and resume the lifestyles from two months ago. Some businesses will be able to resume operations right away, but many will take a long time to heal. Full-service restaurants will lose money when they can only seat one third of the restaurant due to social distancing rules. This low margin business requires a full dining room during peak hours to make money and the smart ones will not open until the economy is humming. Automakers are going to resume production, but sales are expected to decline 27% this year and there is a glut of dealer inventory. Rental car companies like Hertz are filing for bankruptcy and that will reduce the demand for fleet purchases. These are just two examples from various industries. If I look across the spectrum, I see problems everywhere. The pandemic has caused long-term economic damage and the recovery will be slow. Earnings season has been decent. Tech giants reported solid results and in some cases they benefited from the virus. In most cases only a few weeks of the shutdown were included in the earnings reports. Earnings guidance is not being provided and the recurring theme is that Q2 will be much worse than Q1. Corporations are preserving cash by slashing dividends and by postponing share buybacks. This will soften the market bid. Yesterday we learned that the US Treasury is going to borrow $3 trillion this quarter. That is on top of a combined $1.2 trillion in Q1 and Q3. The printing presses are running at full steam and all central banks are participating. The Fed understands the dire nature of this event and that is why they acted so quickly to cut interest rates. Swing traders are short the SPY at $287. I plan to hold this position through the summer and I believe that we are early. We can expect to take some heat and it will take time for buyers to lose confidence. Good news is priced into the market and the expectation is that the virus will quickly fade away and that the recovery will happen quickly. As evidence to the contrary mounts, the selling pressure will increase. Tonight I will record my Weekly Swing Trading Video and I will be looking for post earnings plays. We will sell out of the money bullish call spreads and out of the money bullish put spreads. Option premiums are still expensive and this strategy allows us to distance ourselves from the action and to take advantage of time decay. If the SPY falls below $277.50 a small head and shoulders pattern will have formed on a daily basis. Day traders need to watch for early signs of weakness. The S&P 500 was up 25 points overnight and those gains have steadily declined. In the last hour of trading yesterday we saw heavy selling pressure and follow-through today would be a bearish sign. With the exception of Japan, foreign markets are open. We've had global holidays the last few trading sessions and the volume has been extremely light. That has resulted in compressed intraday ranges. I'm expecting better price action today. The market is going through a transition and I believe that there will be opportunities on both sides of the market. We will use the 1OP indicator to help us identify reversals and we will use Option Stalker searches to find stocks with relative strength and relative weakness. Support is at SPY $277.50, $280 and $285. Resistance is at $288 and $295. . .
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