Debt Ceiling Deal and How To Trade It

May 30, 2023
Author: Peter Stolcers, Founder of OneOption

A deal has been expected. Tread cautiously early and watch for signs of selling. The first hour of trading will be important.

PRE-OPEN MARKET COMMENTS TUESDAY – The S&P 500 is up 25 points before the open. That would be a nice horizontal breakout if it holds. The market has been pricing in a deal so the debt ceiling rally might not have “legs”.  If approved, the deal would raise the debt ceiling for 2 years (beyond the 2024 elections) and that would be market friendly. The market will not have to deal with it next year and we will avoid another fiasco. Less uncertainty is good for the market.

I don’t trust this breakout for a few reasons:

1. The deal is not signed yet.

2. The Fed could tighten in two weeks.

3. Inflation is still running hot.

4. China’s PMIs could be weak (Wed) and that does not bode well for global economic activity. EU PMIs could also be weak and Germany officially ticked into recession territory.

5. The market rally has been very narrow (a handful of mega cap tech companies).

In my market comments last week I concluded that we will not see a meaningful S&P 500 rally until China’s market finds support. That trend needs to reverse and it will take time. Until then, we should operate under the assumption that we are going to see moves up and down within a trading range.

Day traders should watch the early action. If the first candle is long and red, I would view that as a warning sign. That would tell me that a gap reversal is likely and that we will fill in some of the gap. I would also be weary of a wimpy advance in the first 30 minutes. This breakout is going to attract bullish speculators. Those who jump in too early could be vulnerable to getting flushed out. If the breakout holds for the first hour and if we see stacked green candles on heavy volume, I will plug my nose and embrace the breakout. That would be a sign that buyers are engaged and that no matter what I suspect, I have to respect the move.  

Support is at $417.50 and $420.50. Resistance is at $432.

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