Posted 9:30 AM ET – Happy New Year! May your trading profits be huge in 2022.
The market floated higher into year-end on light volume and that is typical for the last week of trading. Santa Claus visited Wall Street, but resistance at the all-time high was firm. We know that tiny bodied candles on light volume are as sign that the price action is getting toppy. We also know that when the “dogs start barking” (laggards bounce) the market is searching for leadership and that we are due for a pullback.
Stock valuations have not been this high since the tech bubble of 2000 and we are seeing selling pressure as the Fed moves closer to tightening.
Key changes in the FOMC statement from previous months:
1. The Fed will be reducing asset purchases (tapering) at twice the rate that was reported at the last meeting.
2. Virus variants could weigh on economic growth and Real GDP growth was lowered .4% to 5.5% for 2021.
3. Median forecast by Fed officials is 3 rate hikes in 2022 and that is up from zero during the September FOMC. Tightening will happen much sooner than previously expected.
4. Median forecast for 2023 is 4 rate hikes and that is higher
5. Core PCE inflation projections are up by .7% to 4.4% in 2021 (their target is 2% and projections have been 2.5% earlier in the year).
Omnicron is running its course and the self-quarantine time has been reduced from 10 days to 5 days. Patients are 70% less likely to be hospitalized from it and once you’ve had Omnicron, your body’s immune system protects you against the Delta variant. I’m not afraid I will die from Omnicron. Like most people, I just don’t want to get sick and it is much more contagious than the original virus. I believe Omnicron will have an economic impact on Q4 earnings.
Swing traders, your bullish put spreads from a couple of weeks ago are melting away. Manage those trades and buy the spreads back in for pennies. I believe we will see a market dip in the next week or two and you will have a chance to reload. An SPY drop to the 50-day MA would be a level to initiate new bullish put spreads. Don’t go crazy with them at that level. The market could be there very briefly (that is why we want to get a few trades off) or it could drop to the 100-day MA. If we get down to the 100-day you want to manage the bullish put spreads you have on and you want to wait for that support to be confirmed. When the market bounces off of the 100-day MA you can add aggressively to your bullish put spreads. I believe that buyers will remain engaged as earnings season approaches in a few weeks and that will keep longer term support levels intact.
Day traders should not chase the opening gap up today. This move will erase the losses from Friday, but gaps up at this level have been faded. We need to be patient on the first trading day of the year and we should expect a holiday hangover (light volume). Markets in China and Japan are closed. Rush in and aggressively buy the open if you want to join all of the novice bullish speculators. That is not a good crowd to follow and it is the perfect formula for starting 2022 “in the hole”. Instead, patiently wait for opportunities to set up like you promised yourself you would. There is no move worth chasing. Your time spent watching the market during the first 30-45 minutes will provide important information. I believe the most likely scenario today is a gap higher and a compression. SPY $477 was a level where we spent a lot of time Friday and we are back to that level this morning. The bounce this morning feels good, but it is just recovering the drop during the last 10 minutes of the year (noise). During the compression you will have a chance to find stocks with relative strength and you will be able to confirm market support. Use 1OP as your guide and wait for the start of a bullish cycle SPY M5. If you see consecutive long red candles stacked with little to no overlap, stay sidelined. This would be bearish and it would take a couple of hours for support to be established. I don’t believe we will see this today (10%). I am expecting a lackluster low volume day so trim your trade size and your trade count.
Support is at the low from Friday and resistance is at the all-time high.