The Market Is Transitioning – Adapt

The momentum during the last few months is waning and a horizontal range is likely.

PRE-OPEN MARKET COMMENTS MONDAY – If you watched the video I recorded last night, you know my market opinion. This is a major technical support level with significant trendlines and SMAs coming into play. The price action in the last few months has been very choppy without much in the way of momentum. The recent decline has not stacked any “reds” and I don’t believe it has the power to breach significant support. I am neutral to slightly bullish just because we’ve spent more than a month above these technical levels and that is a sign of support. This has not been a poke above them and then a fail a few days later. Last year we spent  most of the year below them and they served as resistance. That is a sign that the down trend is transitioning into more of a horizontal range and that is part of the bottoming process.

If the market drifts down to technical support, I like selling OTM bullish put spreads on strong stocks. If it floats back up to technical resistance I like selling OTM bearish call spreads on weak stocks. This swing strategy is balanced and fairly neutral. Swing traders are still long SPY at $409 and I like having that core position. I would only close it if we power through the $390 level (long red candle on volume).

Day trading will get a little more challenging as intraday ranges compress. In the last few months the 20-day ATR on the SPY has declined from over $9 to $6. When the market opens flat we need to get through the prior day’s high or prior day’s low on good volume early in the day. The longer we stay in that range, the greater the likelihood that we will have a dull day. “Inside Days” after a big move the previous day are also likely to be compressed and dull. Gaps up or down that eclipse the prior high or prior low respectively have the chance to become good trading days. Gap Reversals provide the greatest opportunity for movement and they are likely to attract the 0DTE crowd. Thursday was a good example of that. Once the momentum was set, we saw nice movement both ways. Friday we had a Gap and Go. These are more difficult. Typically, the “move” is quickly exhausted in the first hour and it has run its course. Then the price action remains dull the rest of the day. The exception to this would be a Gap and Go Up when the market is near major support (now) or a Gap and Go Down when the market is near resistance. Those could gain traction and result in trend days.

The economic calendar is fairly light this week. We’ve heard plenty of “Fed speak” and the inflation data points are behind us. The market has largely shouldered bad news and that means the market is likely to find support above major technical levels this week. Am I “go-go” bullish because of this overnight bounce? No. Sellers took a shot last week and now buyers have the ball. Remember, I am market neutral.

Support is at the low from Friday and resistance is at $400 and $405.