Market Will Test Support This Week – Here’s the Game Plan

May 17, 2021

Posted 9:30 AM ET – Last week the S&P 500 tested the 50-day moving average and it bounced off of it. We are in a light news cycle and the market feels tired. It needs time to digest recent gains and I believe that support will be tested again this week. The S&P 500 is down 20 points before the open.

Inflation is a concern and we are seeing commodity price spikes across the board. Hourly wages increased .7% in April and that is the largest input cost for companies. Many analysts are concerned that the Fed’s estimates for transitory inflation are too conservative. Supply disruptions are the primary cause for the price spikes and it would be much better if they were caused by pent-up demand.

I’ve been referencing China the last couple of weeks and they have an eight month head start on the rest of the world. They are a good litmus test for the strength of global economic activity and their numbers are sluggish. This morning they reported that retail sales increased 17.7% in April (Y/Y) and an increase of 24.9% was expected. China is the global growth engine and it has been for more than a decade. China’s market is officially in bear market territory and it has dropped 20% from its high this year. If we are going to see a global economic rebound, why is China’s market down so much?

Retailers will report earnings this week. With stimulus checks in hand and an incredible savings rate during the last year, consumption should be robust. Why were retail sales flat last week (0% and a 1% increase expected)?

Coronavirus cases are decreasing in the US and Europe, but they are increasing in many other parts of the world. This will hamper global economic growth.

Inflation is something that will not go away quietly. It will take months to determine how quickly prices increase and if the Fed will be forced to tighten earlier than expected. I believe that this will keep a lid on the rally and that the market will trade and a range between SPY $400 and $420 for the next two months.

Swing traders should have entered some bullish put spreads last week. We were filled on five of six orders and we are focusing on basic material stocks. I also like financials and I posted a NEW TRADE ON YOUTUBE last night. I don’t plan on adding to positions unless we retest the 50-day moving average. If the low from last week holds, I will add more positions. If that support fails, I will hold off. A few weeks ago the market got every shred of good news that it could possibly want and it was not able to break out. I believe that resistance is strong and that there is not a catalyst to fuel a breakout anytime soon. The best strategy will be to patiently wait for market dips and to sell out of the money bullish put spreads once support is established.

Day traders should look for opportunities on both sides of the market. All is calm on the surface, but there is incredible sector rotation. Tech stocks and Chinese stocks have been excellent shorts. Basic materials and financials have been excellent longs. Red-Hot/Ice Cold and Heavy Buying/Heavy Selling have been my two favorite Option Stalker day trading searches. The strength of the bounce in the last two days suggests that buyers will try to prop the market up early this morning. When the momentum stalls and the gap remains unfilled we will see a round of selling. I believe that will present the best day trading opportunity today and I will be searching for relative weakness early in the day. I am leaning towards the short side this morning, but I want to make sure that there is resistance. I don’t believe that we will see consecutive long red candles closing on their low in the first 30 minutes. If we do, it would be a bearish sign.

Let me repeat my forecast. I believe that the market will be range bound for the next two months. Trading volume will be light and this is a low probability trading environment. Swing traders need to be very selective and they need to wait for dips. When support is confirmed, sell out of the money bullish put spreads. Day traders need to go with the flow. Use the 1OP indicator as your guide and lean on sector rotation. Option Stalker searches will help you find stocks with relative strength/weakness.

Support is at SPY $412 and $406. Resistance is at $417.50 and the all-time high.
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