Market Was Due For A Bounce

This is only a bounce – here’s why.

PRE-OPEN MARKET COMMENTS TUESDAY – The S&P 500 is up almost 70 points since the close Friday. It will fill in some of the gap from the open Thursday and I consider this to be an oversold bounce. Chairman Powell will testify before Congress at 10:00 AM ET.

As I mentioned in last night’s video, the market does not go straight up or straight down. We were due for this move. The drop in oil will provide some inflation relief and that could soften the Fed tightening. That is the underlying premise behind the overnight move.

The market has moved quickly through trading zones and once the move is exhausted it forms a new range. I also referenced this in last night’s video. I believe that we could find support for a week or so and establish a range.

Here are some key points to consider:

1. The downward market momentum is strong.

2. Buyers are passive. They can see the selling pressure and they do not feel any urgency when the Fed is still tightening.

3. The Fed plans to raise 50-75 basis points in July. That is an aggressive move.

4. We do not know if the rate hikes will push the economy into a recession.

5. Earnings season will start in 3 weeks. Strong guidance could establish support and weak guidance could fuel another move lower.

6. After the FOMC statement the Fed will be in recess for 6 weeks. During extreme inflation and tightening, investors will get nervous.

I believe that Asset Managers will remain passive through Labor Day. We will see drops and bounces during that time, but I still feel that we have work to do on the downside.

Day traders should wait for the dust to settle. Stacked consecutive green candles with little overlap would be a sign of strength. The SPY is going to open near the high from Thursday. If we blow through on the first attempt it would bode well for the rest of the day. An early pullback with mixed overlapping candles that preserves most of the gap would be our best scenario. During that dip we can find the strongest stocks and the nature of the move is a sign that the bid is strong. I say that this is the best case scenario because I believe that we are due for a bounce. Watch the big 5 tech names. They need to lead the charge this morning. If we lose more than half of the overnight gains it will be a sign of weakness. Do not chase the open. Remember that Powell speaks 30 minutes after the open. That could spark a move either way.

Support is at $363 and resistance is at $371.