The Market Will Test the Low of the Year
There is no reason to chase stocks. Wait for your window to set up.
PRE-OPEN MARKET COMMENTS MONDAY 9:00 AM ET – The SPY has been in a steady decline the last few days and this morning we are going to make a new 52-week low. All eyes are on the FOMC statement Wednesday.
The ECB is reducing its asset purchases and they are preparing for tightening. Their interest rates are currently -.5% and the implied interest rate at the end of the year is 1.25%. That suggests that a swift round of tightening is likely. They announced they will raise rates by .25% in July. With a reluctance to raise rates at a faster pace, you have to question the strength of their economy.
The FOMC is expected to announce a 50 basis point rate hike Wednesday and they are likely to pave the way for a 50 basis point rate hike in July. Asset Managers will “shoot first and ask questions later”.
Swing traders should remain sidelined. Asset Managers will not buy aggressively until they are able to evaluate the impact of higher interest rates on economic growth. Any drop in the jobs reports or other economic data points will spark selling. It will take a few months to determine if higher rates are weighing on growth. Drops like this will eventually result in a fantastic buying opportunity. We don’t pick tops or bottoms. We need to wait for that capitulation low. It could happen in a week or a few months.
Day traders need to wait for the right set up. There was a chance to catch a small part of the drop Friday after 45 minutes, but the market compressed most of the day. There was also a nice shorting opportunity in the last hour of the day. If you held overnight shorts, congratulations. I would suggest taking gains on some or all of the position early today. Typically these big gaps down do not retrace much. The most likely scenario is a drift lower and a compression most of the day. If by chance we get a nice bounce of 20+ S&P 500 points and if that bounce has mixed overlapping candles, we will have an opportunity to short when the bounce stalls. That bounce will also help us find stocks with relative weakness. Technical breakdowns on heavy volume are your best prospects. We do not want choppy D1 patterns and nearby support. We want breakdowns with lots of room to run before the next support level. It is VERY unlikely that we see consecutive stacked green candles with little to no overlap in the first 30 minutes. If we see that it will be a sign that the bounce could last for a couple of hours.
The market is falling right to the May 20th low. We should see some decent trading today, but Tuesday and Wednesday are likely to be very slow ahead of the FOMC statement.
Support is at SPY $380.50 and resistance is at $390.
