Support Will Be Tested Next Week. Price Action Afterwards Will Give Us the Info We Need
The market is showing signs of strain. In recent months, swift declines have instantly been met with buying. The decline from Monday resumed Wednesday and we made a new relative low. The selling pressure continued yesterday.
This is a warning sign and the bid has weakened. Asset Managers are no longer worried that they will miss the next big rally and they will wait for evidence that an economic recovery is underway.
After a five-month market rally to new highs, you would expect investor confidence. All of the puzzle pieces were in place a few weeks ago and everything looked great. In a matter of days, traders are unable to find the next global driver.
There is plenty of bad news. The biggest economies in the world have structural deficits and debt levels are ballooning. Central banks are printing money to keep everything afloat and stimulus is not resulting in economic growth. Europe is in dire straits economically, the US is crawling along and China has hit its lowest growth level in over a decade.
The lack of attractive investment alternatives is keeping our market afloat. Corporate revenues are flat, but profit margins are healthy. Cash flows are at record levels and balance sheets have never been stronger. Companies are using cash to buy back stock. They are also hoarding it. They don’t want to get caught in a credit squeeze like they did in 2009 and their outlook does not justify investment in plant and equipment (or payroll for that matter).
If I focused on a long-term outlook, I would be broke. I would have positioned myself for a global financial crisis a year ago and I would have been wrong. Central banks around the world have created the biggest Ponzi scheme ever. As long as no one flinches, it can continue.
All I really care about is accurately forecasting three weeks out. That time horizon gives me plenty of time to adjust.
European conditions are dire, but as long as credit concerns remain subdued, there is no element of surprise. They will gradually sink further into the abyss.
China’s growth is still at 7.7%. Government officials are happy with that growth rate and they don’t have any stimulus plans. The flash PMI next week will not be as bad as feared.
US economic releases have been soft, but we are still in growth territory. Many investors are writing this off as a soft patch because April 2012 went through a similar cycle.
Earnings will be in focus next week. They have been decent. Good news was priced in at the market high and even after beating estimates, stocks pulled back. They will be ready to rebound once the market finds support.
I still believe we will probe for support next week. SPY 153 will hold and we will get a nice little earnings rally. That move will quickly run out of steam and traders will wait for the next round of economic news. If activity continues to decline, the market will roll over.
I am day trading for the next week. I use the one hour range as my guide. If the SPY is above the high of that range, I buy stocks that are breaking out. If the market is below the one hour range I short stocks that are breaking down.
From a swing trading perspective, I believe the next opportunity will present itself next week. We need to test support and it needs to attract buyers. If the bounce gains traction, go long and use a hit and run tactic. If the bounce falters quickly, be ready to buy puts.
Conditions are changing and everything hinges on the next round of economic releases.