Buyers had their chance yesterday and they will be more cautious today. Don’t expect the same early bounce and be more patient with longs this morning.
PRE-OPEN MARKET COMMENTS FRIDAY – The market rally got over-extended last week and now we are seeing profit taking. The high from a week ago has been slapped down and the open from that candle (key bar) has failed. That retracement came in a matter of days and that speed tells us to be patient. Let this pullback continue. As long as the volume remains light, I view this as a normal pullback in the context a longer term up trend.
Overseas markets were generally weak with Asia down 1.5% and Europe down .5%. The flash PMIs for the EU and Japan were soft. European manufacturing (43.6 contraction) and services (52.4 expansion). Japan’s flash PMI fell back to contraction territory (49.8).
There have been a few articles out this week on the state of commercial office space and the decline in prices. This is a macro shift in the workplace and some banks are exposed. Powell told us last week that the risk in commercial property loans is well distributed last week and that the Fed is not concerned.
Funds are selling equities and buying bonds ahead of the end of the quarter. Many have to preserve the allocation percentages. Stocks have gone up relative to bonds so they represent a larger percentage of the assets so they sell one and they buy the other. That is one explanation for the soft price action this week. This is also why I anchored the AVWAPQ to the first trading day after triple witching. This is when fund managers act.
Powell reminded the market that the Fed is hawkish this week and that they could hike in July. That was a cold splash of water, but there was nothing new in his testimony before Congress.
Bears want to see nice stacked red candles on heavy volume. This would suggest that we have more room on the downside. The market is testing the low from yesterday. Given the drop in overseas markets and the generally soft price action this week, I believe this move lower will gain traction this morning. DON’T EXPECT A BOUNCE LIKE WE HAD YESTERDAY. Use more caution with longs early today. Buyers will take notice that the selling pressure has been persistent. They will not rush in and support the market like they did yesterday and they will wait to see how aggressive sellers are. Bulls want a nice hard low established in the first two hours of trading. A bullish hammer/bullish engulfing candle off of the low of the day followed by stacked green candles on volume would indicate that buyers are still interested. Until we see that type of price action, expect a gradual leak lower.
Support is at $430 and resistance is at $434.30 and $436.50.