The Bounce Lacks Volume

April 3, 2023
Author: Peter Stolcers, Founder of OneOption

Without volume we can’t trust this market bounce. Tread cautiously.

PRE-OPEN MARKET COMMENTS MONDAY – This is a holiday-shortened week and we will get a decent round of economic releases. The light volume drift higher has been able to rise above all the major moving averages.

ISM manufacturing, ISM services, ADP, JOLTS and the jobs report should be solid. ISM manufacturing has been slipping and it is in contraction territory. ISM services had been slipping, but it bounced last month. Job growth has been strong and analysts are expecting 245K new jobs in March. The hourly wage component will be important and anything less than .3% will help to ease inflation. These numbers should be fairly market neutral.

The official EU PMIs have been released and they hit a 4 month low. China’s Caixin manufacturing PMI was flat and that could be a sign that the reopening backlog from the Covid-19 shutdown has already run its course. Japan’s Tankan survey was flat. In aggregate, this is not a robust backdrop.

OPEC is going to cut production by 1 million barrels per day and oil prices are up 5% overnight.

Next week the CPI will be released and that will be an important number. In two weeks, earnings season will kick off and we will hear from banks. That could shed light on recent credit issues. The market bid is typically strong ahead of mega cap tech earnings. These stocks (QQQ) have been leading the market rebound and it will be interesting to see if they have any gas left in the tank.

This light volume rally has not changed my neutral to slightly bearish bias. I still believe that swing trades need to be very short term in duration spanning only a few days. Much of the move Friday was influenced by Q1 window dressing/programs and that inflated the volume. If you look at the previous 10 trading days that followed the recent low, the volume on this bounce was abysmal. The Fed injected liquidity into the banking system and there has not been a new failure in the last two weeks. The notion is that the Fed will stop tightening and that there is not a credit crisis. I believe it is still too early to tell how widespread the issues are.

Day traders should wait to see what happens during the remaining part of this bullish cycle. After a strong run last week, buyers will try to scoop this early dip and test the upside. A wimpy bounce would suggest resistance and that could set up a nice short on the first 1OP bearish cross. The move in the last hour Friday featured long mixed candles with overlap. That suggests that sellers are close at hand and that the move was getting a bit “frothy”. I believe that any move higher from here will come on light volume. Given the overnight news and the recent run up on light volume I don’t feel that Asset Managers are going to feel any sense of urgency to buy at these levels. On the flip side, I do believe that volume could be decent on any drop and that is where I see the greatest potential today. It has been difficult to find attractive shorts because of the recent market rally. Financials have been weak. I suggest looking for stocks that gapped down through support last week and that flat lined. These stocks will be ripe for shorting. If the market rallies I would suggest being fairly passive here. If we get a decent market drop with long red candles and decent volume I would be a bit more aggressive since that move has a chance to gain momentum.

Support is at the low from Friday and resistance is at $410.

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