Trade On Your Terms

April 4, 2023
Author: Peter Stolcers, Founder of OneOption

Don’t chase opening gaps higher. This is a light volume rally with lots of retracement.

PRE-OPEN MARKET COMMENTS TUESDAY – 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 rally above all the major moving averages.

ISM manufacturing came in light yesterday (46.3 vs 47.4 expected). It is squarely in contraction territory. JOLTS will be released today 30 minutes after the open. ISM services and ADP will be released Wednesday and the jobs report will be released Friday during an exchange holiday. ISM manufacturing has been slipping recently and the trend continues. 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.

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. In his annual letter, JPMorgan Chase CEO said, “The current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come.” But importantly, recent events are nothing like what occurred during the 2008 global financial crisis,” he added in the letter released this morning.

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.

OPEC is going to cut production by 1 million barrels per day. This will keep a bid under energy stocks.

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. The bounce looks great, but previous light volume moves like this have reversed in the last year.

Day traders should not chase gaps higher. Most of these have retraced and if you are wanting to trade from the long side, you will have a better entry point later in the morning. Overseas markets were up so the backdrop today is good. There was no material news overnight to justify a run-away Gap and Go today. If that scenario materializes (very unlikely) we will find a good entry point during the day. An entry at a higher level might mean that we have to pay more, but our odds of success will be much higher because we will have all of the price information from the opening to lean on. The message here is that you do NOT have to chase stocks on the open. A more likely scenario today is that the early rally fizzes, the bid is tested and support is established. During that time we can evaluate the relative strength of stocks and sectors and we can see how organized the market selling is.

Support is at the low from Monday and resistance is at $415.

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