The Market Catalysts Are Gone

May 5, 2023
Author: Peter Stolcers, Founder of OneOption

This was our chance to breakout and we are still trapped in this range.

PRE-OPEN MARKET COMMENTS FRIDAY – This week had the potential to generate a large market move one way or the other and it has yet to produce. If the SPY stays above the major moving averages and below horizontal resistance this week, we could be in for dull trading the rest of the month.

The FOMC statement was hawkish across a few fronts. 1. Don’t expect any rate cuts this year. That is contrary to the Q5 rate cut that is priced in. 2. We are going to continue the balance sheet roll-off. This is a form of tightening. 3. We are leaving the door open for more tightening and it will depend on economic conditions. The reaction was muted.

The debt ceiling is approaching and Congress only has a handful of days remaining this month where both the House and Senate are in session. I’ve been through so many of these. Both sides will leverage the moment and they will play “chicken” to see who flinches. If we get too close to the deadline, the market will drop and they will raise the debt ceiling at the 12th hour.

Apple reported solid numbers and the reaction is positive. The stock is testing the high of the week and the August high is within striking distance.  This is a substantial resistance level for the stock. Mega cap tech stocks have led the rally and they have all reported. This potential upside catalyst is gone and some of the air will be let out of the balloon (short sellers and profit takers will be more aggressive).  

Financial stocks are under pressure. I have been mentioning that it is dangerous to swing trade from the long side until we are certain that there are not any more failures. FRC is another casualty and according to analysts, there are a couple dozen regional banks with similar balance sheets and exposure. PACW is in the crosshairs now. These issues can escalate quickly and credit is the biggest market concern right now.

The jobs report was strong, particularly in the private sector. ADP signaled that. In April 253K jobs were created. This gives the Fed more breathing room to hike if they want to. Wages grew at .5% and that is “hot”. That is the largest input cost for companies and it is inflationary. Will we see “good news is bad news” selling? The initial reaction has been positive.

Right out of the gate the SPY is going to fill the gap from Wednesday. That was also the low from Tuesday and this is a significant price level. If the market can move through it with ease on the first attempt and if we see heavy volume and nice consecutive green candles, we could grind higher (20% chance). There is room to run and some of the losses from this week will be erased. This move would be a gradual drift higher. I am not seeing the type of pre-open excitement that would suggest a gap and go rally from the open. Overseas markets were mixed with Europe up and Asia down so there is no impetus there. During earnings season the volume for SPY and QQQ have been slightly above average and we needed much better. Both indices have major resistance levels to get through and all of the catalysts during the last two weeks have failed to produce a breakout. For this reason I believe the market will try to move higher and stall. The price action has been terrible and the initial reaction (lack thereof) has me leaning towards a dull day. Watch for the first wimpy move of the day. When it is exhausted, watch for a reversal. That first contra move of the day will set up a decent trade. Try to find pockets of strength/weakness and hanker down on a few names that are oblivious to the market. Those major D1 breakouts on heavy volume are the key.

Support is at $404 and resistance is at $408 and $410.

The market is trapped in a tight range above the major moving averages and below horizontal resistance.

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