SPY Support Held – Now What?

Yesterday the SPY tested the 100-day MA and it bounced. Here’s what we learned.

PRE-OPEN MARKET COMMENTS FRIDAY – Since the breakout a week ago on a lighter than expected CPI, the volume has dried up. The SPY checked the 100-day MA yesterday and that support level held. This morning the S&P 500 is trading 35 points higher. The overnight news is light.

What have we learned in the last week? Asset Managers are not concerned that they will miss a year-end rally. If they were, the volume would be heavy and the market would not have drifted all the way back down to the breakout.

Fed officials (Bullard) have remained hawkish this week and the market has shrugged off comments that inflation has not been tamed and that more rate hikes are needed.

Intraday trading has been very lackluster. There is very little momentum or volume.

Seasonal strength, stock buy backs and record levels of cash are keeping a bid to the market. As long as SPY $390 holds you can favor the long side. The bounce off of the 100-day MA should keep buyers interested today, but light volume rallies are vulnerable and I suggest keeping swing trades to a minimum.

Day traders can trade from both sides. Stocks with heavy volume breakouts have had decent momentum. The market will not help or hinder. The stock will have to do all the work so your selection has to be excellent. If the market stalls at an extreme (high of day or low of day) it is likely to reverse. If the SPY is on its low of the day and you see mixed overlapping candles on the way down on light volume you know the trend is weak. Watch for tails, bullish hammers, bullish engulfing candles on the lod and a bullish 1OP cross. When you get this combination you want to buy stocks with relative strength. Look for the opposite at the high of the day and favor weak stocks. This is guerilla warfare. Pick your points and “hit and run”. Don’t expect long sustained moves. Trim your size and trade count. If you find one or two “gems”, focus on them.

I do like the long side today. Europe was fairly strong and Asia was mixed. The volume overnight was above average on the move higher. The ideal set-up this morning would be a drift lower with mixed overlapping candles. That would be a sign of a weak move and we want to see most of the gap preserved. That move will give us time to search for stocks with relative strength. I don’t like chasing stocks especially given the backdrop the last week. If we get a gap and go higher, I would wait on the sidelines. Sooner or later sellers will surface and the market will pullback. Don’t worry that you have missed the move. Stay patient and you will get your chance later in the day. I am not expecting a gap reversal with stacked red candles early. If you see this pattern and more than half of the gap is filled you need to favor the short side.

Support is at the 100-day MA and resistance is at the 200-day MA.