Need This Price Action This Week

October 17, 2022
Author: Peter Stolcers, Founder of OneOption

If the market can get through this resistance I will trade from the long side.

PRE-OPEN MARKET COMMENTS MONDAY – A market bid is forming as we prepare for earnings season. The long green candle from Thursday held the halfway point Friday and the S&P 500 will open  45 points higher this morning. At the start of the year, stocks were trading at a P/E of 23 and now they are trading at a much more reasonable P/E of 15. The “E” in that equation will be revealed in the next few weeks and guidance will be critical.

Banks will benefit from higher interest income, but we have to watch the bad loan write downs. NFLX will report Tuesday after the close and TSLA will report Wednesday. MSFT reports 10/25, GOOG and META report on 10/26 and APPL and AMZN report on 10/27. I am expecting a decent market bid this week as we prepare for those releases.

The BOE has stopped supporting the gilt (bonds). When sovereigns have to backstop their bonds it is not a good sign. UK pension funds were getting margin calls. Credit markets are showing some signs of strain around the globe. There is nothing imminent, but conditions can change quickly.

Inflation is raging on and most analysts believe it will continue well into 2023. It won’t continue to increase at this incredible rate, but it won’t moderate much either. Consumers will be hit with higher borrowing costs and higher living expenses. That will impact discretionary spending into the holiday season. Amazon attempted a second Prime Day last week and they barely saw an uptick in purchases from the normal level. This could bode poorly for retailers, many of which are cancelling shipments so that they can work off inventories.

The last week of October and the first week in November are historically the two most bullish weeks of the year, often because the market is recovering from deeply oversold conditions in August/September. There is a mountain of cash sitting on the sidelines. It won’t go into bonds with interest rates rising and with the Fed steadfast in its plans to tighten. I do believe that some money will go into stocks. I am not looking for a major rebound, but I am looking for support and a bounce in the next few weeks. This is a contra trend opinion and that means I have to be VERY cautious. I will not take any swing positions until I have technical confirmation. When I do take them, they will be relatively small and short in duration (2-3 days). The macro backdrop is still very uncertain. I would like to see a rally above the high from Friday today and I would like to see follow through buying through $380 this week. That would give me some confidence and I will consider trading from the long side. If we do not reach those levels this week, it will be a sign that buyers are still overpowered by sellers.

From a day trading standpoint, chasing gaps up in a bearish downtrend is foolish. Hopefully you avoided that trap Friday. That was a nasty gap reversal. If the gap up turns into a “Gap N Go”, let it run and don’t trade it. Later in the day you will have a chance to enter from the long side (wait for a bullish 1OP cross). Waiting for that window will provide important information. You will be able to watch for stacked green candles and volume early in the day. I am not expecting a “Gap N Go” today because of the selling we saw Friday. Buyers will be cautious. The long green candle from Thursday and the halfway point being preserved Friday is a small victory for buyers. I believe we could see a gradual drift lower today with mixed overlapping candles. That is a sign of weak trend strength and I would like to see more than half of the gap preserved this morning. If this plays out, there will be a nice opportunity to buy stocks with relative strength. If we see stacked red candles in the first 45 minutes with little to no overlap, expect a gap reversal. At very least we will fill the gap and we could start chewing into more of that long green candle from Thursday. This would be incredibly bearish price action and it would suggest that we are going to test the low from last Thursday in the next week.

Support is at the low from Thursday and the close from Friday. Resistance is at the high from Friday.

I will only swing from the long side if we clear these levels this week.

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