This is the pattern we are likely to see and here’s the strategy for it.
PRE-OPEN MARKET COMMENTS FRIDAY – Buyers are in control and the market has added to the breakout from two weeks ago. We are seeing rotation into cyclical stocks and small caps and that is a sign of “risk on”.
What should we do now? I like the price action this week. The market was able to move higher after the CPI and the FOMC. We know that there are unresolved issues (possible regional bank failures, additional rate hikes, softening economic data points and stretched stock valuations). That means that a run-away rally is unlikely. This is going to be a stair-step pattern where we take two steps forwards and one step back.
A couple of weeks ago the market was still in a holding pattern. We had mixed overlapping candles and no clear sense of direction. It was very difficult to swing trade because a nice overnight move up would instantly reverse. Now we know that dips are likely to be brief and shallow and that they are buying opportunities.
Today is triple witching and we are still likely to see a decent bid. Don’t expect a rally like we had yesterday. During a triple witch week we are likely to have one really nice move and we got it. As we head into next week, the news dries up. The June jobs report won’t be published until after the holiday so we are heading into a news vacuum. We will get the official PMIs at the end of next week, but those are not typically big catalysts. The 4th of July falls on a Tuesday so many traders will be taking Monday off to extend the weekend (myself included).
Why am I looking two weeks ahead? Because that is what the market does. It is constantly looking for the next catalyst and this is a news driven environment. I see a dead spot coming up. We might still have a little upside, but recent gains need to be digested.
As the market pushes higher, set targets and take gains on swings in the next few days. Regardless if you are day trading or swing trading your mindset should be to buy dips and to take gains into strength. Use the new alerts to help you do that. If you have a strong stock, set a F-T alert for Strong vs SPY or LRSI using M30 or H1 for swing trades. These longer time frames will require a meaningful dip in the stock. That means you will have greater upside when it triggers (one step backwards, two steps forward). We want to catch that move with the notion that the stock will take out the recent relative high. Use this same strategy for day trading and use M5 as your time frame.
What do we know about gaps up to a new relative high like the one we are getting this morning? Bullish speculators with FOMO will pile in and these gaps up are often faded. After a nice rally the last week, we can expect some profit taking on the open. There will be a bid check and the depth and duration of that move will help us to gauge the strength of the market and it will give us time to find the best stocks. Overseas markets were strong and much of that is fueled by our rally (as opposed to new overnight news). We are not likely to see long red stacked candles on heavy volume. The bid is simply too strong. A gradual drift lower with mixed overlapping candles is the best we can expect and we might not even fill the overnight gap. You can buy with greater confidence knowing that the bottom is not going to fall out and you can even cheat a little. If you start seeing tails and tiny bodied candles on the way down you can start buying as long as there are no long red candles. It is always important to enter trades well, but if you get trapped in a long, take a deep breath. If you have selected a strong stock that has broken through technical resistance and it has heavy volume and relative strength, it will come back. You might have to overnight it, but that risk is reduced. I would avoid chasing high flying stocks and I would focus on stocks that are still moving up towards the 52-week high and that have room to run.
Support is at SPY $439 and resistance is at $450.
HAPPY FATHER’S DAY!