After a heavy round of selling I expect to see a bounce and then a compression above the major moving averages. Here’s why.
PRE-OPEN MARKET COMMENTS FRIDAY – The market does not go straight down or straight up. After 3 weeks of selling, the S&P 500 found support at the 200-day MA yesterday. The major moving averages have been converging so the 100-day MA so they are all constantly in play. The volume during the decline has been better than average, but we are not seeing any long red candles. Instead, the bodies are tiny and the intraday ranges are compressing. The 20-day ATR was $9 in November and now it is $6. VIX/VXX are relatively low because of the market price action and we have not seen a spike.
Dovish comments from Bostic (Fed non-voting member) sparked a bounce. I don’t believe this was scheduled so it took the market by surprise. Kashkari and Waller are both hawks and they spoke after the close yesterday. The market was able to hold the gains and it is up before the open today. Powell will testify before Congress Tuesday and Wednesday. TLT has broken an uptrend line two weeks ago along with the 100-day MA. This morning it is breaching another up trendline from October 21. The ECB is expected to hike 50 basis points on March 16th. The FOMC statement is on March 22nd.
Until inflation eases or the Fed rhetoric changes, buyers will be relatively passive. They will buy dips, but they will not chase. Asset Managers who feel that Fed tightening is closer to the end and who feel that a soft landing is likely will nibble. That is why the market is gradually pulling back. The move is lower and it is steady.
The bounce yesterday was overdue. We could tell that from the price action. Much of the bounce was short covering related. If buyers are truly interested at this level, we will see follow through this week. The FOMC in two weeks and the inflation readings will be important.
Swing traders are long SPY at $409 from two weeks ago. If the SPY blows through the 100-day MA, we will take our lumps and wait for a better entry point. If the SPY closes below $390 (evaluate in the last 5 minutes of trading), exit the position. I do like selling OTM verticals and I have been favoring bullish put spreads. I also like selling naked puts on stocks I like to buy. I feel that the market is going through a bottoming process and that we will see drops and bounces.
Day traders need to watch for stacked red candles. That would be a sign of heavy selling and this gap up will be slapped back down. That would lead to a gap reversal and a likely bear trend day that tests the major MAs. I believe this is unlikely because of the price action on the way down. There is nothing to suggest that sellers are that aggressive. Instead, the bid will be tested early. We want to preserve most of the gap and we want to see nice green candles stacked on good volume. The day will start on a bullish cycle and it needs to produce. After a decent market drop, there will be short covering to fuel the move. Some longer-term money will also flow in at this level (200-day MA). If the opening rally is wimpy, it will be a sign that buyers are not that interested and we will see a choppy day with two-sided action. Traders will wait for Powells speeches next week and we will compress just above the major MAs. This is also a very likely scenario. Watch for these price movements and use 1OP cycles as your guide. ISM Services will be posted 30 minutes after the open and i would not take any big trades before that.
Support is at the 200-day and 100-day and the 50-day MA. Resistance is at $401.40 and $404