Thanks For the Lump of Coal “Jerry”

November 3, 2022
Author: Peter Stolcers, Founder of OneOption

The Fed Chairman doubled down on hawkish policy.

PRE-OPEN MARKET COMMENTS THURSDAY – Yesterday Jerome Powell put a lump of coal in our stockings and he squashed any chances for a year-end rally. A slightly less hawkish tone would have done the trick, but instead he doubled down. He said that the incoming data since the last meeting suggests that the ultimate level of interest rates will be higher than previously expected and that “there is more ground to cover”. That was a splash of cold water and the market closed below the 50-day MA and the upward sloping trend line. The next move is lower and the S&P 500 is down 30 points before the open.

I did not have a position on before the announcement, but I did have a bullish bias going into the statement. A less hawkish tone would NOT have forced the Fed to change their policy. They could have stayed on the same tightening path and some of the cash that is on the sidelines would have flowed into the market. This very low hanging fruit will die on the vine.

Overseas markets were down overnight. Europe and Asia have been posting weak economic numbers. Europe’s manufacturing PMI is deeply in contraction territory and it fell for a 4th straight month (46.6). It has not been this low since May of 2020 (Covid-19 peak). China’s PMI fell into contraction territory in October and the Covid-19 shutdowns continue. Conditions are so dire in China that Xi is softening his zero-Covid-19 stance.

In the US tech stocks have been pounded on weak earnings and pessimistic guidance.

I can’t go against one of my trading axioms for swing trading. I do not short into year-end so swing traders need to stay in cash. If you sold OTM bullish put spreads on, this is one of those times when you can leg out. You will have a market tailwind lower. If the stock has been weak on a relative basis and if it is close to the support level you were leaning on, buy back the short put and place an order to sell the long put at the price you pay for your short put. If you are not a seasoned trader, buy the spread back for a loss.

Day traders should trade from the short side. We have technical breakdowns on a daily chart to support short positions. Today is one of those times when you should consider taking some early short positions. Don’t go nuts; enter ¼ of a full position early. You might not get much of a bounce this morning. The only pattern I would NOT add to shorts on is stacked green candles that immediately fill the overnight gap. That is very unlikely (10%). If that happens I would stick with the shorts you have. Even if the gap fills, I do not believe we will get much above the close Wednesday. A gradual drift higher with mixed overlapping candles would be a gift. That is a sign that the bounce is weak and it will provide a great entry point to add to shorts. The most likely scenario is a steady drift lower. In that case you will be scaling into shorts and adding to winners. This day has the potential to get nasty.

Resistance is at the close from Wednesday and support is at SPY $365.

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