Here’s The Set-up For A Great Trade Today

Before the open you need to devise a game plan and you need to know how you will react to various scenarios. We don’t always get what we want, but this is the set-up I will be watching for.

PRE-OPEN MARKET COMMENTS FRIDAY – There is not a lot of incremental overnight news. The S&P 500 will open inside of the prior day’s range and it is flat. The market is bumping up against major horizontal resistance. This light volume bounce is 10% off of the low from March. It will need a catalyst to push it through on heavy volume. Earnings season could be that driver, but I doubt it. I still believe the market needs to spend time in the range and earnings need to catch up to valuations. Asset Managers are not aggressively buying and that is why the volume is so light.

Since the bank failures, the Fed has injected $1T of liquidity into the system. That reduces credit risk. When there is lower risk, shorts start to cover positions. A Citigroup Analyst believes that liquidity injection translated into a 10% market rally. He also believes the Fed is removing that liquidity already.   

Earnings season will keep a decent bid to the market for a few weeks and we will see how much gas is left in the tank. Tech stocks lead the rally and the QQQ is trading at a forward P/E of 27. The SPY is trading at a forward P/E of 18.5. Both are “rich”.

The economic calendar was light this week and global activity has been slowing down. Hawkish comments from the ECB are weighed on European stocks this week and those markets are flat overnight. Asia was down a little overnight.

The employment numbers are starting to soften (ADP, JOLTS and initial jobless claims). Wednesday the Beige book showed that; labor conditions are weakening, manufacturing was generally down, freight volumes were down and 9 of the 12 regions had flat activity and only 3 had modest growth. Thursday’s initial jobless claims number was 249K and it is starting to rise.

The next FOMC meeting is May 2-3 and the last statement was hawkish even after the bank failures. That is going to be a very important week since mega cap tech earnings will be released along with ISM manufacturing/service, ADP and the jobs report.

The low volume tells me that this bounce is vulnerable. We are seeing signs of resistance, but we do not short until we have a technical breakdown. Any probe for support is likely to be very choppy. There will be a bid until mega cap tech stocks report.

Day traders should expect action similar to what we have seen in recent weeks. It is critically important to read the price action and to wait for your windows of opportunity. Earnings season is yielding pockets of strength/weakness. Yesterday you could have bought home builders and shorted TSLA and stuck with those moves the entire day. Look for D1 post earnings breakouts on heavy volume. There were not any major overnight earnings releases so those will be more difficult to find today. We have a low volume “inside day” on tap. The best move yesterday came on the drop. It had good momentum and volume. This morning 1OP will start in a bullish cycle. Buyers will try to prove that yesterday was a “one off”. A wimpy light volume bounce is likely. Sellers are not going to go away quietly. If the first move today is higher with mixed overlapping candles and light volume, we will have a good shorting window. Watch for wicks and tiny bodied candles around the $413 level. We don’t want the first bounce to be much taller than that and we don’t want it to last for more than 45 minutes. We also don’t want heavy volume on the bounce. These would be signs of strength and I am not expecting that. A bearish hammer or a bearish engulf off of the hod are signs to watch for. If that coincides with a bearish 1OP cross, short weak stocks and expect the lod from Thursday to be tested.  After that first move, you have to conduct price analysis just as I have outlined. The key today is volume. If we don’t have it, trim your size and your trade count.

Support is the low from Thursday and resistance is the high. We might not clear those levels today.