The market has been testing this support level all week. If it is breached we have to respect the breakdown.
PRE-OPEN MARKET COMMENTS FRIDAY – The market is testing major support this morning at the up trendline that starts at the October low. This is also the 50-day MA. If that level is breached, we will test the SPY $390 level. That is the 100-day MA. If the market tests this support again and it closes well above it today, we can expect a bounce. This is a key technical price level. That means we could go either way. The good news is that regardless of the outcome, we should have some decent action today and next week.
I have had a bullish bias because the market has been trading above all of these technical levels. The likelihood that we will bounce off of this support is greater than the likelihood that it will fail for that reason. If we were south of these technical levels and we could not breakout, I would have a bearish bias. When we breakdown, we want to do it with conviction. We need to see heavy volume today with nice stacked red candles with little to no overlap. That would be a sign of heavy selling pressure and it would be a sign that buyers have pulled bids on the belief that they will be able to buy at lower levels. To this point, buyers have been persistent. They have ignored hawkish Fed comments and “hot” inflation numbers. This morning’s PCE came in hotter than expected and that has bears excited. In the last 3 days, we have seen good volume on the drops and good volume on the bounces. Both sides are active.
Swing traders we are long. Here’s what we want to see. On the open, I would like to see sellers take their best shot. Let’s see those stacked red candles on heavy volume and signs that buyers have no interest. If that is the case, we will exit our long SPY position on a close (5 min before the bell) below SPY $395 and we will wait for a better entry point. From a swing standpoint I would need to see the market obliterate the 100-day MA before taking a swing short (I would day trade short). If we do not get those stacked red candles, it will be a sign that buyers are still interested. If SPY $395 survives the first hour of trading, we are likely to bounce in the second half of the day as we have the last few days. That type of price action today would discourage sellers and embolden buyers next week and we are likely to bounce.
Day traders need to watch for stacked red candles on heavy volume (very bearish). Anything less and you should wait. A new low of the day after an hour of trading and you can favor the short side. You do not want to get trapped in these bounces so waiting for that confirmation is important. Lower highs and small retracements are a sign of steady selling pressure. I would be careful of any early bounce that does not stack at least 4 green candles. We could see a wimpy little bounce with mixed candles and that would be vulnerable to reversing. I am not expecting stacked green candles. Overseas markets were a little soft before the release so there is some selling pressure. Let sellers have their way. We’ve seen selling pressure the last week and they are not going away. A higher low double bottom after an hour of trading and a low near $395 would be a sign that a meaningful bounce is coming.
Note: It is easier for sellers to knock the market down when we have a gap up (gap reversal) than it is to drive it lower (gap and go) on a drop. The momentum from the gap reversal has a chance to build.
We’ve seen two-sided intraday action the last few weeks. Unless you see clear signs that this is going to be a trend day, don’t assume that you will be able to trade one side and ride your trades. You must be nimble and you should expect reversals.
Support is support until it is breached. Then it is resistance. Let’s see what happens. We are right on support the 200-day MA is the next support level. Resistance is the close from Thursday.