The market won’t like it.
PRE-OPEN MARKET COMMENTS TUESDAY – I liked the price action last week and it suggests that the low of the year will hold. That does not mean that we need to load up on bullish positions. I am still expecting some nervous jitters in August/September. Stock buyers can sell out of the money naked puts below technical support on stocks they want to own. This is a very sound strategy at this juncture.
This is going to be a busy week for economic releases. ISM manufacturing came in better than expected at 52.8% yesterday and ISM services will be posted Wednesday. The jobs report will be posted Friday. It should be pretty good because initial jobless claims have increased slightly in the last few weeks.
In the last week my bias has changed and at very least I feel that the low of the year is safe. A financial crisis in China still has me spooked, but that will take time to manifest and there will be warning signs along the way. Consequently, we will trade as if they are going through a rough patch and we will not expect the worst.
I still believe that there will be a soft patch in August/September. Swing traders can sell out of the money bullish put spreads below technical support on stocks that have relative strength. I prefer to keep them short term (3 weeks or less) and they should never span an earnings announcement. The support levels above the short strike price will provide added protection and we will let time decay work its magic. Market dips like the one this morning will give you an opportunity to enter them.
In August the “rats” (politicians) will flee DC when they take recess. When no one is at the helm, the market gets nervous. Stories like the Pelosi trip to Taiwan will capture the headlines and we can expect low volume drops. This news has been out there for weeks and I view the market sell-off today as profit taking after a strong rally last week. The media will try their best to justify every market wiggle and jiggle. Know that the recent rate hikes have not cycled through the economy and that analysts are still gauging the impact. Asset Managers will remain relatively passive. They won’t chase rallies, but they will buy dips and a base is forming.
Day traders should be patient. This gap down is NOT likely to produce the same gap reversal we saw yesterday. Buyers were going to remain fairly aggressive on a drop like that when resistance had not been confirmed. This morning we have new information. The high from Friday was preserved yesterday and after multiple attempts the market pulled back from the high of the day. During the gap reversal we also saw several very long red candles and that was a sign that sellers were more aggressive. The 100-day MA will represent resistance and the futures are down 25 points before the open. I still like trading from the long side and I feel that the price action is steadier. This morning you will have more time to look for stocks and it will take longer for the market to find support.
There are a couple of set-ups I would like to trade. One would be a green candles with overlap that make it look like another gap reversal. If those candles start to compress, it will be a sign that bullish speculators who are trading yesterday’s pattern are going to get flushed out. We also have a spike in 1OP so a bearish cycle is close. That would fuel the move lower. If we gradually drift lower with mixed overlapping candles a good buy will set up. Buyers will still be interested and there will be a good opportunity to get long if the bearish 1OP cycle is benign and we see compressed tiny candles and tails under body. If by chance we see stacked red candles consecutively (very unlikely), it will be a sign that the selling pressure is heavy and we could see a drift lower all day. The overnight news was not that significant and I do not see this happening.
Support is at $400 and $407. Resistance is at $413.