The market broke through the 200-day MA on heavy volume and here is my take.
PRE-OPEN MARKET COMMENTS THURSDAY – The market was trapped in a tight range and the volume was extremely light the last 3 weeks. Traders were looking for news that might spark a breakout in either direction and the speech from Fed Chairman Powell yesterday had the potential to do that. The reaction was bullish and the S&P 500 rallied 130 points during his speech. From a technical standpoint, the market is resting just below a major trend line.
So what did we learn yesterday? Powell said that we will see a reduced tightening pace as soon as the December FOMC meeting. That is not new! A 50 basis point rate hike is expected in 2weeks and that is less than 75 basis points (June, July, September and November). Rate hikes of 25 basis points are expected in January and February. Those are also less than 75 basis points. If this news was already priced in, why did the market rally?
I believe that traders were positioned for another “Jackson Hole” beat down where Powell stated that the Fed will remain vigilant in taming inflation and that the market reaction would be negative. When the market started to rally on the news, shorts were forced to cover and that fueled the rally. This is similar to the price action we saw on the slightly lighter than expected CPI on November 10th. Traders were expecting a market drop on a “hot” number and they were short. When the reaction was positive they got squeezed and the market shot higher.
What evidence do I have that this is just short covering? First of all, the speech from Powell yesterday and the CPI reading in November did not materially change the landscape. This news was already in the marketplace. Secondly, there was no follow through buying after the November 10th spike. The volume remained extremely low and the market compressed. If buyers were genuinely interested, we would have seen immediate follow through on heavy volume. If I do not see that in the next few days, I will deem yesterday’s move to be short covering.
I’ve mentioned that I do not swing from the short side in November and December. Now you know why. Seasonal strength is incredibly strong. We have record levels of cash on the sidelines and corporate buybacks are at a brisk pace of $10B per day. That is keeping a bid to the market.
What else did we learn this week? PMIs in Europe and Asia are well into contraction territory. This morning the PCE came in at .3% (.4% expected) and this is inflation metric is used by the Fed. The Beige Book yesterday also showed that apartment rents have declined and that real wages are starting to decline. ADP was a little light, but initial jobless claims have been low and that bodes well for Friday’s jobs report.
The S&P 500 rallied above the 200-day MA yesterday. That breakout in and of itself is not meaningful. We need follow through on heavy volume to confirm the breakout is real. The market could just as easily fall right back through that level flushing bullish speculators out of their longs. There is a major D1 downward sloping trend line that will provide resistance at this level. If I see follow through on heavy volume this week I will embrace the breakout. If not, I will view this as a year-end short covering bounce.
The big pops on volume and ensuing light volume compressions have me doubting the move higher. I still can’t embrace longer term bullish swing trades so we will stay sidelined.
Day traders should look for follow through buying early this morning. The “light” PCE will attract bulls and overseas markets were positive. 1OP is spiking and I would NOT chase the opening rally this morning. There is major overhead resistance. Bullish speculators will rush in this morning and they will get flushed out. I want to see a wimpy rally with mixed overlapping candles. That will tell me that the first move is vulnerable to profit taking. On a pullback I want to see the close from Wednesday preserved. Organized selling with stacked red candles would suggest heavy profit taking. I am not expecting that after the rally yesterday, but I am mindful of what that pattern represents. Once the bearish 1OP cycle runs, I believe we will have an excellent opportunity to buy. Early buyers today will be flushed out and that will provide us with time to find stocks with relative strength.
If only there was an example of a similar set-up. I have included a M15 chart from November 10-11th.
Support is at the 200-day MA and resistance is at SPY $414.