Sellers won this battle, but the bid is stubborn.
PRE-OPEN MARKET COMMENTS FRIDAY – The news has been heavy the last week and buyers and sellers are battling it out. The Fed has been hawkish and earnings have been underwhelming. In spite of that, the market has been able to hold the bid. Yesterday the market showed signs of strain. The gap up reversed and the selling momentum gained traction. The S&P 500 closed on its low of the day and it is down 30 points this morning.
On a short term basis we had a High+ trendline that was broken earlier in the week and we fell back below it. What was bullish is now bearish. The High- trendline that started in January was breached (bullish) and it is still intact. It is not the best technical gauge because it is negatively sloped and the SPY will have a hard time catching it. For that trendline to fail, the SPY would have to fall below the 200-day MA quickly. US 10-Year Treasuries are on a critical support line. If that trendline is breached it will signal higher interest rates and that will create selling pressure for the market. The CPI will be released next week and there are some inflation jitters ahead of that release.
On a longer term basis, I still like the market resiliency we’ve seen in the last few months. The Fed has been hiking rates at an unprecedented pace and inflation is still high. Earnings have underwhelmed and valuations remain stretched. Yet, the market bid has remained strong. Economic conditions remain stable and China is reopening. I am not a raging bull here. This is going to be a bottoming process. I do believe that we are going to avoid a full blown economic and market meltdown.
Swing traders are long SPY at $409. This is a longer term swing and we are going to take some heat on it over the next few days. I still feel this will be a good entry a few months from now. As far as selling bullish put spreads, let this dip run its course. A choppy grind down to the 200-day MA would indicate that buyers are still engaged and support at that level would set up and opportunity to sell spreads. If those moving averages are tested quickly and they fail with ease, do not sell the spreads. This would be a sign of aggressive selling and we need to hold off. I don’t believe this will happen, but if it does, we will exit the SPY position and wait for a better entry.
Day traders should expect follow through selling. Bears won this battle and the selling pressure was heavy yesterday. Stacked green candles on the open would indicate that buyers are still interested and that the action yesterday was program driven. That would result in a gap fill. I don’t believe we will see this. A wimpy bounce with overlapping candles would be our best scenario. When that bounce stalls a good short will set up. I don’t believe we will see a meaningful rally until the overnight low has been tested. Also, keep an eye on TLT. It is at a critical juncture. Mixed overlapping candles and a drift lower right away would suggest some support, but a passive bid. This is the most likely scenario. There is not much support until $400 so there is room on the downside. Stacked red candles on the open would tell us that sellers are clearly in control and that the selling pressure is heavy.
Support is at $400 and resistance is at the close from Thursday.