Next Wednesday the Fed is expected to hike interest rates by 50 basis points. Even more concerning is the fact that their rhetoric is likely to reflect another 50 basis point hike in June. This is casting a dark cloud over the market and extreme selling has pushed the S&P 500 to within striking distance of the low of the year.
Earnings season typically attracts buyers, but not to this point. That is a sign of “risk off” on the part of Asset Managers. They will shoot first and ask questions later. The whiff by NFLX and GOOG set a negative tone and the drop in TSLA (related to Elon having to sell shares of TSLA to finance TWTR) set a nasty backdrop. MSFT rallied after the release and it stopped the bleeding in tech yesterday. Worst case scenarios were priced in as we prepared for FB. The reaction to FB after the close was incredible and the stock surged 20%. This is providing a nice market bounce ahead of AAPL and AMZN tonight.
Swing traders with a 3-4 week time horizon should wait patiently in cash. Our moment will come after the FOMC meeting. A deep market drop below SPY $380 would provide an excellent buying opportunity, but we need to confirm support. Even then, we are likely to sell out of the money bullish put spreads on strong stocks to take advantage if inflated option implied volatilities. Keep searching for stocks that have excellent earnings reactions and relative strength.
Day traders will be faced with a tricky scenario this morning because of the scenario that I believe will play out. The best advice is to watch the price action and not to chase the rally. These gaps higher have been faded routinely and the logical reaction is to look for a shorting opportunity. I would not short any pullback that did not have stacked consecutive candles with little to no overlap right on the open. If we get this pattern it would be a sign that this will be a gap reversal. A massive gap up like we are seeing this morning off of a support level (near the low of the year) is a sign of heavy buying. For that reason I believe that any selling this morning with mixed overlapping candles will be very brief and we could explode higher. That makes shorting particularly dangerous today. This is where the tricky part comes in. I believe we could see a gap and go formation where the entire move unfolds in the first hour of trading. Then the market will compress and we will wait for results from AAPL and AMZN. We want to see strength in tech and it needs to lead the charge. Use that as your guide. We are also going to see some end of month buying.
Support is at SPY $415. Resistance is $423 and $429.