Nice Overnight Market Bounce – Lot’s of “Fed Speak” Today

May 17, 2022

Posted 9:30 AM ET – PRE-OPEN MARKET COMMENTS TUESDAY – The S&P 500 was able to hold onto gains from Friday during yesterday’s session. That has attracted buyers this morning and the S&P 500 is up 60points before the open. It will clear a horizontal resistance level at SPY $406 and global markets are providing a springboard.

The incremental news overnight is fairly light. China has some improvement on the Covid-19 front and that is sparking optimism. Their retail sales were down 11% and I can’t recall seeing a drop of that magnitude even during the onset of Covid-19 two years ago. China’s smartphone shipments dropped 40% last month and there will be supply disruptions.

Today we will get a fair dose of “Fed speak” It will be a reminder that two 50 basis point interest rate hikes lie ahead. The Fed will also start progressively reducing their balance sheet. The economic impact of higher interest rates will not be known until this fall. This will be a splash of cold water for investors so be careful.

There is an extraordinary amount of cash on the sidelines waiting to be deployed. Money has flowed out of stocks, but it has not been reallocated to bonds. Investors are waiting for higher yields and/or market support before investing. We are going to see volatile conditions for the rest of the summer and I still believe we have not seen the low for the year.

Swing traders with a 2-3 week time horizon need to remain in cash. This move is a short term bounce. We still need to see that capitulation low where the market hits an air pocket and then snaps back violently. That will signal a major support level.

Day traders there is no reason to chase stocks. A move of this magnitude does not typically retrace much off of a near term low. We are likely to grind higher and compress, just like the price action Friday. That means the majority of the move might run its course in the first 90 minutes. If the market retraces slightly with mixed overlapping candles, that is a sign of a weak trend and it will provide a good entry point for longs. I am NOT expecting long red candles stacked with little to no overlap. That would signal a gap reversal and if you see it, do not buy until support is established. It is best to be patient. You might miss part of the move higher, but when you do enter you will have confidence knowing that buyers are engaged. You might also benefit from an early dip and that will help you find relative strength.

Support is at $400 and resistance is at $406 and $415.
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