It is critically important to conduct scenario analysis. Know what you expect will happen and which outcomes present the greatest opportunities.
PRE-OPEN MARKET COMMENTS TUESDAY – This month we’ve seen selling pressure and the market fell below major technical support levels. We can expect seasonal weakness through September and the news was “heavy”. The market does not go straight up or down and we have been expecting a bounce.
Buyers needed signs of support and they have it. The drop Friday reversed and the market closed near its high of the day. Yesterday an early gap up was quickly faded and the bid was tested. We had a higher low (Monday vs Friday) and that was the sign buyers were looking for. As the day unfolded the market continued to grind higher and it closed on its high yesterday. Overseas markets were generally positive and the S&P 500 is up 20 points before the open.
So what should we expect today? “Gap and Go” patterns are difficult to trade because much of the energy behind the move has been exhausted right on the open. Our risk is greater buying gaps up because there is a chance for a gap reversal and support is much farther below so we don’t have much to lean on. Since the SPY is at the low end of the 60-day range, buyers will be more aggressive now that support has been confirmed and the odds of a “Gap and Go” are greater.
For day traders, I suggest waiting for the first 30 minutes before buying. Make sure the open has been preserved and look for tails under body. That is a sign that buyers are supporting the gap up and that attempts to knock the market down have failed. Only trade small starter positions early and buy stocks that have remained strong during the recent market decline and that are rallying through technical resistance on heavy volume. The longer the market is able to hold that opening price, the greater the chances that the market will advance. Ideally, the market holds the gains and it compresses near the high of the day during a bearish 1OP cycle. If you see this, you can add to winning positions on the notion that the next bullish cross will send the market to a new hod.
If the market drifts into the gap in the first 30 minutes, hold off on buying. Wait to see how much of the gap is preserved. At the low end of the 60-day range with support being confirmed, I would expect more than half of the gap to be preserved. This would be a sign that buyers are going to defend the move higher. This is our best case scenario for buying. That pullback will provide us with an excellent entry point and the best stocks will stay near the high of the day (and even tick higher) during this market bid check.
What if we see stacked red candles in the first 30 minutes? That is a sign of a gap reversal and you should wait to see if the gap fills. This is a sign of selling pressure and it could result in a bearish trend day (very unlikely today). It would also be a sign that any bounce over the next few days is temporary and that sellers are aggressive.
What if we see stacked green candles with little to no overlap and heavy volume in the first 30 minutes? That is a sign that buyers are aggressive and that we are likely to challenge the 50-day MA very soon. You would have to chase the move and since we don’t like to do that (because our risk is greater) you trade smaller size. The majority of the move will unfold in the first 90 minutes and then we will compress.
What should swing traders look for? As I have been telling you, the selling pressure has been fairly steady this month and the news has been rather “heavy”. Interest rates are spiking and there are credit concerns in China. The Fed is steadfast in tightening and Powel l will remind us of that Friday. Your trading mindset is to take gains on shorts when we have big drops and then go to the sidelines. Wait for the bounce to stall and then reload shorts. I have been expecting a bounce here and I want to see a gradual, light volume float higher with mixed overlapping candles and stubborn price action. Those mixed candles will be a sign that sellers are still nearby and the light volume is a sign that buyers do not have a lot of conviction. I would like to see SPY $445 resistance hold. If this bounce has lots of pops and drops with a general upward bias, it would keep my bearish thesis intact.
What if the market blows through the 50-day MA? This is possible and that is why we take gains on shorts during the big drops. We need to see the bounce. How strong was it? What did the candles look like? Did it come on heavy volume? How long did it last? All of this information tells us how to position ourselves. If we blow through the 50-day MA, it becomes support. Then we have to adjust our expectations. We wait for a dip and if that low is well above the 50-day MA, we know we are back in buying mode.
What do I believe is going to happen? It really does not matter; I trade price action, not what I believe. The drop this month does tell me that there is selling pressure. The big news this week is Nvidia earnings tomorrow after the close. If the reaction is negative and we stay below the 50-day MA, Powell’s speech Friday is likely to attract sellers and we are likely to drift down to the 100-day MA next week. This is what I believe is the most likely scenario, but I am going to trade what is in front of me.
I plan to day trade today and watch for the patterns I have outlined above. Then I will know how to position myself.
Support is at the 100-day MA and resistance is at the 50-day MA.