Know what you want and know how you will act if you get it. This is the key to position sizing.
PRE-OPEN MARKET COMMENTS MONDAY – As you know from my video last night, I believe that the market is due for a pullback. This bounce has come on extremely light volume and we are near the upper end of the trading range. Are buyers going to feel like this is the last chance to buy when credit concerns are elevated? No. Are stock valuations so compelling at this level that buyers will discount the soft round of economic news last week? No. The light volume bounce the last few weeks signaled a low level of conviction. If buyers were really excited we would have seen stacked consecutive green candles on heavy volume. This was more of a relief bounce. The Fed flooded the system with liquidity and there were not any new failures during the last few weeks. That sparked some short covering and some buying.
From a technical perspective we know not to pick tops. We do not trade reversals until there are signs that the trend is exhausted. Light volume, tiny bodied candles, wicks, bearish hammers and bearish engulfing patterns are clues that we watch for. Last Tuesday I pointed out that we had a bearish engulfing candle off of a relative high. Thursday, the market forgot all about that selling pressure and it rallied the entire day. Shorts that were early got rattled because there was no follow through and they took heat. Bullish speculators that wanted to buy a dip got their chance. This is a very common pattern near a relative high and it is why we patiently wait for that resistance to be confirmed before we short. After a 3 week rally, we need to use caution and we need to respect the move regardless of how bearish we might be. If today closes below the low from last week, the selling pressure will be confirmed and we will have a lower high.
The economic releases last week were soft domestically and abroad (with the exception of the jobs report). The CPI will be posted Wednesday and that will cause some nervous jitters.
Swing traders should focus on very short term trades that span a day or two. If the SPY closes below $406 I feel that you can take a few bearish overnight swings. I would exit Tuesday and I would not hold those positions into the CPI.
Day traders should expect a “holiday hangover”. The action is likely to be light. Overseas markets were generally strong. The S&P 500 has given back the gains from the jobs report. There is no reason to believe that we will see a “Gap and Go” drop. I will be looking for a wimpy bounce with mixed overlapping candles. That price action will set up a good short. 1OP is in a bullish cycle and it is spiking. A bearish cycle is likely in the first hour. I believe the action will be choppy during the first hour. I would like to see a bullish cycle that does not produce much of a bounce and I would like some of the gap to remain open. If I get this scenario a good short will set up. Industrials and cyclical stocks in general will be good shorts.
Given the light volume bounce and the weak round of economic news, I believe our best chance for movement is on the downside this week. There are bullish speculators (weak hands) that can be flushed out. Any move higher will come on light volume, the ranges will be compressed and we are near D1 resistance. That means that trading from the long side has very limited upside potential. We want a market drop and we want to trade from that side because it presents the best risk/reward and the best chance for momentum for us. Unfortunately, we don’t always get what we want.
Devise your game plan. Know what you want and what you don’t want. Know when you will be aggressive and when you will be passive.
Support is at $405.50 and resistance is at $411.50.