Posted 9:30 AM ET – The market has established a distinct pattern this year marked by sudden drops that last for a few days and violent snap back rallies that result in a new all-time high. The cycle is completed by a very gradual light volume float higher that lasts a few weeks. We are currently in the third phase of this cycle and I expect to see stable conditions with a slight upward bias the rest of the month.
Earnings season is behind us and the results were good enough to hold recent gains. The expectations are high and valuations are stretched.
The economic news has been solid, but slightly below expectations. Global flash PMIs were on the light side yesterday.
Last week we learned that the FOMC “tabled” tapering, but that is not likely to happen until 2022 (especially with the Delta variant). This is bullish for the market.
Many parts of the US are shutting down because of the spread of Covid. This will keep the Fed sidelined. However, it will hamper the economic recovery.
Swing traders with a 3-4 week horizon should stay sidelined. This is a seasonally weak period and the price action for the SPY has been very choppy. Trading volume improves during these drops and snap-back rallies and then it dries up. We could see a more pronounced market decline in September. In the last 25 years there have only been 3 times when the S&P 500 has closed higher seven months in a row and if the market closes right here in a week, this would be the 4th. There have not been 8 consecutive months where the market has closed higher in the last 25 years.
Day traders should not chase the opening gap up. Wait for support to be established. Yesterday we had a gap and go rally and that is the least favorable day trading pattern for us. All stocks rally with the market on these moves and it is difficult to identify relative strength. The risk of a gap reversal keeps traders on their heels and the majority of the gains happen in the first hour of trading. After that, the market compresses in a tight range and the action dies off. I barely traded yesterday and I do NOT view this as a lost opportunity. The gains I could have made on that move are much smaller than the psychological damage that would have been done if I loaded up and had the rug pulled out from under me. If the market gapped up and compressed for 30-45 minutes I would have participated. If the market gapped up and filled in some of the gap I would have been fairly aggressive with my longs. The dip would have helped me find relative strength and it would have provided an excellent entry point. I would have also had a market tailwind to fuel the stocks once support was established. It is very important to determine your trading game plan before the open and to know which patterns you will trade aggressively and which ones will keep you sidelined. Back-to-back “gap and go” formations at a new all-time high are fairly rare and I will wait patiently for support today. I believe that the action will die down today (relative to the last week) and that we will see a tenuous grind higher once support is established. Expect tight daily ranges for the rest of the month.
Support is at SPY $442 and $447. Resistance is at $448 and $450