Bullish the Rest of the Week On Jobs Data – But Bearish Longer Term

Posted 11:30 AM ET - Yesterday, the market sold off in sympathy with China. Horizontal support at SPY $200 held. The market established a low early in the day and it never got close to challenging it. It made a higher low and it gradually moved upward the rest of the day. As I explained in my comments yesterday, this is the most likely scenario. I day traded from the long side and I'm doing so again today. The market will bounce this week. Yesterday's move was sparked by an 8% selloff in China. You won't hear anyone else talk about this, but I have my own theory. Chinese investors weathered a nasty storm last year. They wanted to exit, but they did not want to pay taxes on capital gains. China's market bounced toward year end and investors were anxious to sell. When trading resumed in January, they all hit the exit at the same time. This sparked panic selling. I believe the selling in the US was overblown on a short-term basis and we were just following China. All of the financial news outlets said that weak economic conditions in China sparked the selling. Official PMI's were largely in line. The manufacturing PMI only missed by .1% and the services PMI was actually little bit better than expected. Both were just under 50 and they have been there for the last couple of months. I don’t believe weak economic data has anything to do with the decline. ISM manufacturing in the US declined, but we've seen soft numbers for a few months. Manufacturing only accounts for 20% of our economic activity and the services sector is much more important. A strong dollar will have a greater impact on manufacturing that will on services. ISM Services should hit 56 on Wednesday. The jobs numbers have been steady the last few months and ADP will set a positive tone tomorrow. Stocks will rally and the SPY could challenge the 100-day moving average. On a longer-term basis, the market looks weak and the technicals are deteriorating. If the SPY struggles to rally above $203 I will start selling out of the money bearish call spreads. I might even buy a few puts. We got a major warning sign in December. Seasonal strength did not spark a rally and that is bearish. January typically starts off on a positive note and the tone has soured. On a very short-term basis, I am looking for a bounce this week and I will trade from the long side. I will monitor resistance at the 100-day moving average and if it is formidable, I will start selling out of the money call credit spreads. If we can rally above it, I will continue to day trade from the long side until the momentum stalls. Market conditions have been very choppy and I am keeping my forecast inside of a one-week time horizon. Day trade from the long side and keep your overnight exposure to a minimum. If by chance we close below SPY $200 this week, buy puts and hold them overnight.

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