Consolidation Phase – Look For Choppy 2-Sided Action. Set Targets and Get Out When the Move Stalls
Yesterday, the market staged an impressive rebound. I could dissect the news to justify the move, but I’m not going to. This is a normal consolidation and we can expect volatility.
Retail sales and initial jobless claims were better than expected. This morning, PPI came in hot. None of these news items are driving the market.
Central banks have done all they can and the market is looking for its next driver. It has to come in the form of economic growth.
Comments from the FOMC next week will be consistent with this line of thought. If they see economic growth, they will taper. The market won’t like it initially, but it will embrace the move if it is accompanied by growth. If economic conditions continue to struggle, the Fed will continue to ease.
Europe is weak, China continues to slip and the sequester is taking a toll on domestic growth. This will be revealed in the flash PMI’s next week. It will take us a couple of months to get through this cycle.
I believe we will still see some nervous trading next week. From a bearish standpoint, we don’t want to see the market rally much beyond SPY $164. That would create a higher high and the three-week mini downtrend would be over.
This is the heaviest selling we’ve seen this year and I still believe we will probe for support. SPY $159 is likely to be tested and it should hold. From that point forward I expect the market to trade in a range between SPY $159 and $168. For the first time in years we could see a boring summer (doldrums). We won’t have to deal with a credit crisis in Europe this year.
FedEx will release earnings next week and their guidance is important. They are considered a barometer for economic activity.
We are in a news vacuum and you should expect choppy trading. That means you have to sell rips and buy dips. When the move loses its steam, you have to take profits before they vaporize. I don’t believe we will see sustained directional moves and you have to set targets.
Bulls will see if they can push the market higher once the downside is tested this morning. If we rally above SPY $164 and the move stalls, I will look to buy puts. I’m not going to carry a large position over the weekend. I need to see late day selling and a close below SPY $164. If we chop around on light volume, I might call it an early day.
If you caught the rally yesterday, protect profits. I made money on my put positions when I shorted on Wednesday and if I didn’t exit, I would be faced with losses. Don’t let that happen in this choppy market. Remember, we are in a consolidation phase and you won’t see sustained moves.