Short-term I am slightly more bullish, but longer term we still have work to do on the downside.
PRE-OPEN MARKET COMMENT THURSDAY – The market has been forming support after a fast drop last week. Yesterday we saw a big gap reversal that erased early losses. Stacked consecutive green candles with little overlap were a sign of strength and on the first attempt the SPY filled in the gap and it blew through the prior day’s high. Unfortunately, the buying dried up after that. Sellers took advantage of the bounce and much of the gain evaporated.
After a large drop, you would expect a decent bounce that establishes the upper end of the trading range. Buyers have not been able to get the market off the deck. The strong show of support yesterday will attract some buyers, but I still believe that Asset Managers are going to be passive through August. They want to see if the rate hikes are going to push the economy into a recession and that will take time. Earnings season is a few weeks away. The comps will be harder to beat and profits could be impacted by higher input costs and supply disruptions. After the July FOMC meeting the Fed will be in recess until September. Any economic soft patches during that time will spark selling.
I am watching initial jobless claims closely. This is a “current number” and it will help us track employment every Thursday. The number has been decent the last two weeks and employment is stable.
From a longer term swing standpoint I don’t see any reason to buy here. Very short term swing traders can sell OTM bullish put spreads on stocks with defined technical support and relative strength. Stocks that have formed a higher low double bottom in the last two weeks during the market drop are strong relative to the market and they are good candidates for the strategy. GOOG is an example. Distance yourself from the action and take advantage of time decay.
Day traders should expect two-sided price action. The market tried to rally overnight, but some of those gains have been given back. I will be watching for consecutive stacked candles of a single color with little to no overlap. That will be a sign of trend strength and if they coincide with 1OP you can get behind the move. When the momentum stalls, expect a reversal.
Short term (2 weeks) I am looking for a bottoming process and I am more bullish than bearish. Longer term (2 months) I still feel we have some work to do on the downside.
Support is at $362 and resistance is at $378. That huge range should tell you that conditions are volatile and we have hit both of those points in the last 3 days. There are plenty of day trading opportunities. The key is to find the right stocks. Make sure you have a couple of longs and a couple of shorts ready at all times.