Posted 9:30 AM ET – From a technical standpoint yesterday was a critical juncture. The market would either confirm a bullish flag formation or it would confirm the downward sloping trendline off of the recent high. The price action turned ugly after comments from a Fed official and the SPY closed below the 100-day MA. This morning the 200-day MA is being challenged.
The FOMC minutes will be released this afternoon. These hawkish comments have been circulating since the FOMC meeting a few weeks ago. An accelerated balance sheet run off and the possibility of two consecutive 50 basis point rate hikes is nothing new. I believe that the relief rally we saw the last few weeks was premature and that it got over-extended. Now we are going to see selling pressure.
The domestic economic data has been good. ISM services and ISM manufacturing were generally in line with expectations and the employment numbers were solid last week.
China is another story and I have been citing my concerns. Overnight we learned that the Caixin Services PMI fell to 42.0 from 50.2. This is a massive drop and it is due to the Covid-19 shut downs
Earnings season is only a week away and that typically attracts buyers. Share buybacks are on track to hit new records ahead of earnings season. New repurchase announcements by U.S. companies reached over $300 billion in the first quarter and S&P 500 companies spent around $880 billion buying their own shares last year, up from $520 billion in 2020, according to S&P Dow Jones Indices. Goldman Sachs in a report last month estimated S&P 500 companies in 2022 will spend $1 trillion buying up their own shares. This is an incredibly powerful force and I mention it often. No matter how dire things seem, companies are aggressively buying back shares and they are issuing cheap debt to do it.
If it sounds like I am wishy-washy… I am. There are incredibly strong market forces in play on both sides and that is why the market has been so volatile.
Swing traders with a 3-4 week horizon are on the sidelines. We were either going to get a bullish flag or a breakdown and now we know that we have to wait for support. I still believe that when support is established we will have an opportunity to sell bullish put spreads into earnings season. Support at $420 is building and I want to see a higher low on this market drop well above $430. We should get that window soon, but we do not have to rush to judgement. Let’s see what happens at the 200-day MA. When conditions are right, I might take an SPY position as well.
Day traders should have some early action today, but it will die down after 3 hours of trading as traders wait for the FOMC minutes. The market is going to open below the 200-day MA and we need to see what happens at that level. I believe our best scenario would be a nice drop early and support in the first hour (ideally with a double bottom higher low). Then a rally back to the 200-day MA where we will rest and wait for the FOMC minutes. I am more inclined to take gains on overnight shorts in the first hour than I am to initiate new shorts.
Support is at $442.50 and the 200-day MA. Resistance is at the 100-day MA.