Still Selling Pressure. Line Up Bullish Picks and Wait For Support Next Week.

September 28, 2012

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The market tested the downside this week and buyers quickly stepped in. The bid is strong and we are not likely to see much of a pullback.

Q2 GDP declined .4% and that was much worse than expected. Economic activity grew at a meager pace of 1.3% (final reading). Durable goods orders fell 13.2%, one of the worst readings in many years. Even with this gloomy economic backdrop, the market was able to rally yesterday.

Spain released its 2013 budget and that sparked the rally. The comments suggested that they were meeting targets and the groundwork has been laid for a formal bail out request. Before noon, they will reveal the results of their bank stress test.

Most analysts feel that they will need $60 billion in aid. I suspect the report will under estimate the crisis. Europe’s banking stress tests have been known for this. Spain does not want to spark fear and they know they can always go back to the trough if needed.

Consequently, I believe the news will be benign. The market already has this priced in. Greece is negotiating its bailout terms and it will strike a deal with the troika. Germany and France want Greece to stay in the union. This is all good for credit concerns and bill Gross (largest bond fund manager in the world) is buying short term debt in Spain and Italy.

China will release its PMI on Monday. I believe the number will be relatively weak. Their market has rallied 4% in the last two days. Their market will be closed for a week long holiday. Most analysts believe that the leadership change in a few weeks will be bullish. The old regime will pass the baton and the PBOC will ease. This would spark confidence during the transition. Monetary easing and government spending will pacify recession concerns.

Major US economic releases include ISM services/manufacturing, ADP, retail sales and the Unemployment Report. Initial jobless claims have been steady the last few weeks and the jobs reports should not dampen spirits.

I still believe we will see a little weakness during the next few days. Support at SPY $143 was tested and it held.

Yesterday’s reaction to Spain’s budget was all “fluff”. We didn’t learn anything new and the market is taking back those gains this morning. I still believe the reaction to the PMI’s Monday morning will be negative. The market will probe for support and bullish speculators will get flushed out. The economic news will not be great next week, but it won’t be horrible either. Stocks will find support and they will rally into earnings season.

If support at SPY $143 fails easily next week, we could hit a small air pocket. I don’t believe we will fall below $140. Major support lies at $138. This dip will present an excellent buying opportunity. The rallies have been very swift and you need to have your bullish picks ready. This selloff will culminate with an intraday reversal.

I suggest placing buy stop orders and adjusting them on a daily basis. As stocks drift lower, lower your entry point. This will get you into the trades when the market rebounds. When the time comes, I will buy November in the money call options. I believe this rally will last for a few weeks and I want to be able to stick with the positions.

I was stopped out of my SPY put position yesterday at $144.50 and I made a small profit. I am not going to short this move. Instead, I will focus on the bigger move that lies ahead. I am lining up my longs and I am adjusting my entry prices on a daily basis.

The selling momentum is picking up steam this morning. Asset Managers are pulling their bids and they will wait for support. We will establish a low by mid-morning and the bleeding should stop after Spain’s bank stress test (noon eastern). SPY $143 will hold today.

Be patient, we are a couple of weeks away from a major move. The lower we go, the better the entry point.
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