Market Tests 100-Day MA For the Second Time – A Grind Higher Would Be Bullish

January 31, 2014

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Yesterday, the market reversed Wednesday’s losses and solid earnings pushed stocks higher. The rally stalled late in the day and we saw a wave of selling near the closing bell. That momentum is spilling over and the S&P futures are down 10 points this morning.

Traders are adjusting to the Fed’s steadfast commitment to tapering and we still have some nervous jitters to work off. The SPY touched the 100-day moving average on Wednesday and it tested that level again this morning.

Buyers need to show conviction and stocks need to gradually grind higher today if this bounce is going to materialize. The overnight news was benign and this decline is a technical test.

Earnings were good and Google’s strength countered Amazon’s miss. The other earnings were mixed, but they favored the upside.

Global markets are adjusting to credit conditions that are not as loose as they were in 2013. Mind you, they are still loose. PIIGs yields are stable and credit fears are not spreading. Financials that have exposure in Turkey and South America are selling off. That is putting pressure on the sector.

Official PMI’s will be released and they will impact trading next week. Strength in Europe should offset slower growth in China. The jobs reports should ease concerns and I believe December’s Unemployment Report will be revised upwards.

Any positive rhetoric on the debt ceiling will attract buyers. Politicians want to stay out of the headlines and the market will rally once it is extended.

It was a little too easy to buy the dip yesterday. That strategy worked in 2013 and we are being tested today. The one thing that we have learned in the last few weeks is that the “go-go” days of 2013 are gone. The gains will be hard-fought this year.

One of two scenarios will play out today. If the market is able to find support and the 100-day moving average holds, stocks will grind higher into the close. That will attract additional buyers and we should be able to move higher on the economic news next week.

If the market starts to leak oil and we drift lower this morning, we are likely to breach the 100-day moving average and close on the lows of the day.

I sold put credit spreads yesterday and those positions are in decent shape right now. However, if the market starts to drift lower, I will buy them back. I also own calls and I will use the same tactic.

The market still has some jitters to work off, but I feel we are close to bottoming. Global macro conditions are still bullish and earnings have been good.

Asian markets will be closed next week and the liquidity will dry up. Some of the weak news has been coming from China and having them out of the picture will help.

Use today’s price action as your guide. If the market finds support this morning and it starts to inch higher, stick with long positions. We want to see it close near the highs of the day. This will be a sign that buyers have returned. If the market makes a new low for the day after a few hours have passed, we could drift lower into the close. Once that 100-day moving average is breached the selling will accelerate.

Use a close below SPY $177 as your guide.

My gut tells me that this is still a good buying opportunity.

I would not short this market.
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