May 5, 2020
Posted 9:30 AM ET - Yesterday the market gapped down and support was established instantly. Stocks rallied and the gap was filled after the first hour of trading. The market spent the rest of the day in a tight trading range and volumes were down 18%. China and Japan are on holiday and we can expect a fairly slow day today. In the last hour of trading we saw a nice rally and the market finished on its high of the day. As I mentioned in yesterday's comments, we were likely to see some beginning-of-the-month fund buying. That momentum is fueling a small rally this morning and we could challenge resistance at SPY $288 this week. Much of the world is gradually reopening, but early indications suggest that consumers are still very cautious. More than 150 S&P 500 companies will report earnings this week. The visibility is poor and many firms are not providing Q2 guidance. In their comments, most are saying that Q2 will be much worse than Q1. The U.S. Treasury will borrow $3 trillion this quarter to subsidize the rescue efforts and that is on top of $500 billion borrowed in Q1 and $700 billion of borrowing expected in Q3. We are throwing everything we have at this crisis and so are other central banks around the globe. Disney will report earnings after the close today and we can expect horrible results. Retailers will be posting results in the next few weeks and brick-and-mortar companies that don't sell food will be hit hard. Mega cap tech stocks have reported and the earnings excitement will wane. After the open today ISM services will be posted. This is a survey and it is forward-looking. The service sector accounts for 80% of our economic activity and I'm expecting a number that is lower than anything we've ever seen before. ADP will report tomorrow and the Unemployment Report will be posted Friday. As economic activity gradually recovers we will be able to gauge consumption patterns. In the short term, the market bid will remain somewhat strong. With each passing week I expect to see a very tenuous recovery and that will weigh on investor sentiment. China was the first to emerge from the virus and the recovery has been very lackluster so far. Swing traders are short of full position of SPY at $287. Our stop will be a close above $302. We are going to keep it fairly wide initially. As we get clarity in the next few weeks we will monitor the price action and we will adjust our stop accordingly. Tomorrow I will be posting my Weekly Swing Trading Video and I will be highlighting bearish call spreads. There will also be opportunities to sell bullish put spreads on stocks with relative strength, but our positions will be bearishly weighted. The next month should be negative in terms of the news cycle. Day traders should be patient on the open. Make sure that the bid is strong. It will be difficult to spot relative strength early on and I am more likely to focus on the short side. In the last week I have been able to find good shorting opportunities and the price action has been good (sustained moves lower). I am expecting a horrific ISM services number and I believe the market could have a negative reaction 30 minutes after the open. The trading volume has been light and with China and Japan for holiday this should continue. The trading range today could collapse after the first two hours and we need to be cautious. We should get one good move off of a reversal this morning and that is when we need to make our money. The market is trapped in a range and it hasn't moved much in the last month. This means that we are likely to see two-sided action during the day and fairly tight ranges. Support is at SPY $276.50 and $280. Resistance is at $285 and $288. . .
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