This is what I will be looking for in the next few weeks. Don’t guess, wait for technical confirmation.
PRE-OPEN MARKET COMMENTS FRIDAY – The market has shown some signs of selling pressure in the last week and the price action is toppy. This is typical for August and now that mega cap tech companies have announced earnings, shorts will be more aggressive. I don’t have a keen sense for market direction because this could be a bullish flag formation (market makes a new 52-week high) or it could be a double top lower high.
There has been a huge disconnect in the bond market. Prices reflected a rate cut in Q4 and the Fed has been steadfast in signaling a possible rate hike in Q4. That adjustment started to gain traction a week ago (bond sell off) and the debt downgrade by Fitch threw gasoline on the fire. Interest rates are spiking because of this adjustment and not because the Fed is going to hike rates aggressively. One more rate hike of 25 basis points this year is possible, but it might not be necessary. Inflation is starting to wane and the Fed is almost done tightening.
The earnings news has been good. AAPL dropped after reporting yesterday and AMZN rallied. They will negate each other and the market is flat before the jobs number. Valuations are stretched so there is room for stocks to retrace. Investors typically get nervous in August.
Seasonal weakness is not enough to justify shorting. We need price confirmation.
Bull markets die hard. I am expecting one more push higher in the next few days. If that bounce is not able to get back to the high from last week it will confirm that buyers are not that aggressive near the 52-week high. If that pattern surfaces, your day trading can take on a more balanced look. Chances are you will start to see more stocks on the bearish searches and the intraday moves on the short side will be much more sustained (nice orderly price action with lots of consecutive red candles on good volume) than the ones you find on the long side (mixed overlapping candles on mediocre volume). Use that price action as your guide. If you see it, favor the short side and go with the momentum.
As far as swing trading from the short side, we need to have technical breakdowns in the market. If we have a lower high double top and then a long red candle through SPY $445.60, we can start to consider some overnight shorts. I suspect that this will take at least a week to set up and I will note that price action in my pre-open comments.
This is the 12th hour for this rally. I am not overly bearish or bullish. The rally to this point has been strong and the price action has been orderly on good volume. Valuations are stretched so higher interest rates will provide a stiff head wind. Traders will take time off before the kids head back to school and the volume will dry up as we head into a new vacuum.
The price action this week was soft and Fitch threw us a curveball. It resulted in a fast drop in bonds, but realize that they needed to get to this level anyway. This news just forced that adjustment to happen faster. In the grand scheme of things, the debt downgrade did not change anything.
I am expecting a jobs report in the 250K range and it should be market neutral. Hourly wages below .3% would be bullish. Let’s see what happens.
I will be taking next week off. Trade well.