Forget the notion that “good news is bad news”. Long-term, here’s why I liked the number.
PRE-OPEN MARKET COMMENTS FRIDAY – The stage was set for a small market bounce yesterday. The bid had been tested Wednesday and the gains from Tuesday held. The market is deeply oversold and with earnings season starting next week I felt the odds of a bounce were high. Unfortunately, the price action yesterday was bearish. Stocks retraced and they closed on the low of the day. When patterns that should work don’t produce, it is a warning sign. Buyers should have been more excited by the fact that support was tested a second time and that it held firm.
Fed rhetoric remains hawkish and they are dispelling the notion of any rate cut in 2023. Inflation is deep seeded and it will not reverse quickly.
Credit concerns are starting to surface globally and central banks with continue to tighten. It is critically important for economic conditions to ease gradually. A steep drop in activity would increase the odds of a crisis.
This morning we learned that 263K jobs were created in September and that was a solid number. Wage inflation (.3%) is tame and that is very important because wages are the largest input cost for companies. The market does not like the jobs report because it means the Fed will keep tightening. I like the news because the longer our economy can shoulder these rate hikes, the greater our chances of coming out of this cycle without a deep prolonged recession. Credit is my greatest concern.
AMD warned that revenues will be down 16% vs previous guidance. They cited very weak PC demand so we can expect DELL and HPQ to decline as well.
Earnings season will start next week. The early action will be dominated by banks. The market bid is typically strong ahead of earnings season, but the lack of any bounce this week from deeply oversold conditions has me thinking that sellers are taking advantage of this and they are unload stocks. That is why we did not have a bounce this week.
The SPY price action is bearish. Remember the gorgeous “gap and go” pattern where the S&P 500 rallied 110 points and it closed on its high of the day Tuesday? Those gains are gone and we are going to fill in that gap this morning. I am staying very flexible with my market thesis and I am day trading. The D1 context set us up with a nice buy this week and when it failed to materialize yesterday I turned much more bearish. The price action this morning confirms that bias. The futures lost 70 points on the number. 1OP will start off on a bullish signal and our best case scenario is that it produces a weak bounce with mixed overlapping candles. When that bounce stalls, I will be looking to short the next bearish cross. The exception would be a bounce that recovers more than half of the gap. A move like that is unlikely and it would suggest that buyers are still engaged. In that event, we have to be a little more patient and we have to make sure we have firm resistance (lower high double top).
Near the low of the year, the bid has been stubborn and I would not be inclined to chase a down gap and go this morning. We have seen lots of choppy price action this week and the risk of retracement is high. If the selling pressure is genuinely heavy, we will pick that up from the price action during the first hour and we will have an opportunity to short a bounce later this morning.
Support is $368.50 and resistance is $371.