Here are the two markets that really matter and what they are doing.
PRE-OPEN MARKET COMMENTS FRIDAY – The overnight news is fairly light as we head into the holiday weekend. The debt ceiling is grabbing all of the headlines. Although we do not have a deal, the market believes that there will NOT be a default. Consequently, any rumors will favor the long side. Expect a dull trading session today.
This is a good time to take a giant step backwards. Let’s zoom out and do some very basic technical analysis. Price and volume tell us everything we need to know.
Often, we get caught up in the fundamentals and with the headlines. What about the debt ceiling? What about the Fed tightening? What about inflation? What about the banking crisis? What about the inverted yield curve? What about AI? What about the tech rally? The market is very news driven these days. One day the market could rally or drop based on these headlines depending on the “slant du jour”. Let’s simplify things this morning.
Our goal is to follow the smart money and it is concentrated in the largest economies in the world. Japan, Germany, the UK and South Korea are all developed nations, but they really don’t matter for our most basic analysis. According to the World Bank, the US and China account for 43% of the world’s GDP. That is pretty close to half of the world’s economic output. If we want to know what the smart money is doing, we really don’t need to track anything else. That is why my focus is always on what is happening in these two countries.
If we look at the weekly chart of the S&P 500 and the FXI (below), we can see what the two largest markets in the world are doing. The SPY has been able to rally off of the low from last year, but the price action has been compressing and the volume is light. It is at the midpoint between the high and the low from 2022. The FXI has been in a steady downtrend and it just broke major D1 support this week at 27. It is also below the 100-day and 200-day MAs.
Until the US and Chinese markets find strength, there is no reason to get excited about a major rally. Yes the DAX and the Nikkei are at all-time highs, but collectively they account for 10% of the world’s GDP. The great post-lockdown Chinese economic boom fizzled out after a couple of months and they have been the global growth engine for the world the last few decades.
We primarily trade the US markets and my conclusion is that we will not see a meaningful S&P 500 rally until China’s market finds support. That trend needs to reverse and it will take time. Until then, we should operate under the assumption that we are going to see moves up and down within a trading range.
I know the NVDA reaction got everyone super excited about a market breakout so I wanted to temper that excitement with the most basic long-term technical analysis on the two largest economies. If you want to know what the smart money is doing, look no further.
Now let’s zoom in for our day trading. The market is poised to open a little higher this morning. Global markets were up about .3% so there is a tiny tailwind. If the market grinds higher as it often does before a holiday and if there are rumors of a deal, the high from Wednesday is 1 ATR away ($4.38). I believe that resistance will hold and it will take some really encouraging news (statements from Congress and not rumors) along with buy programs to get there. Those statements are unlikely given that most of our politicians are well on their way to Martha’s Vineyard. If the SPY can convincingly get through $416 on the first attempt this morning with decent volume, we will float higher the rest of the day. If the market tests the high from Thursday and the move is half-hearted, we will fall back into the range from yesterday. That will result in a low volume inside day. Focus on stocks that have D1 technical breakouts on heavy volume. Light SPY volume would tell you to error on the side of not trading.
I hope that the macro technical analysis helps you put things in perspective.
Support is at $412.40 and $414.65. Resistance is at $418.70
Please take time to honor the brave men and women who made the ultimate sacrifice in service to our country. They bravely defended our freedoms and our way of life.
Happy Memorial Day!