Expect an “inside day” on light volume. We are in pre-holiday mode so keep it light.
PRE-OPEN MARKET COMMENTS WEDNESDAY – Yesterday we were looking for a gap reversal on the open and we nailed it. The heavy selling from last Friday returned and Asset Managers are in “risk off” mode after extremely hawkish comments from the Fed. We can expect more follow through selling in coming weeks, but the action is likely to die down ahead of the holiday and the jobs report Friday. Yesterday’s drop came suddenly and then we compressed in a range the rest of the day.
Last week Powell cited the mistakes made by the Fed in the 1970’s when they did not keep their foot on the brake and inflation returned. To the extent that QE prevented a credit crisis, QT is going to drain bank reserves. It is a stealthy form of tightening. It will matter and it is happening now.
Fed officials are leaning towards a 75 basis point rate hike in September. That is more aggressive than the expected 50 basis point rate cut a month ago. Fed officials do not believe that inflation will be tamed without a decline in economic activity. From my perspective, that means they are comfortable with weak economic data points and that “bad news might actually be bad news”.
ADP released its report after revising their methodology the last 3 months. There were 132K jobs created in the private sector in August and that is below the 300K that was expected. They have changed their reporting methods so this report might not carry much weight. Friday the jobs report will be posted. Initial jobless claims have not spiked and I believe that employment will remain strong. Is good news bad news because it will give the Fed room to tighten? Who knows!
Swing traders will have an opportunity to sell out of the money bullish put spreads when the market finds support. We have been waiting for a market drop, but we did not know how deep it would be or how long it would last. Given the price action since Friday, we could be in a holding pattern for a few weeks.
Day traders that recognized the expected gap reversal had a banner day yesterday. Your goal is to hang on to that money today! When I look at the daily chart, we have lost 10% in 2 weeks. Moves of that magnitude have resting points and we should expect that today and tomorrow. In the chat room yesterday I compared Tuesday’s price action to Friday’s price action and we could see that support was forming. All of the fireworks were blown after an hour of trading. The market is going to open right at the 50-day MA this morning and it will act as a magnet until the jobs report. Our best scenario today will be a wimpy bounce with mixed overlapping candles with tiny bodies. 1OP is in a bearish cycle. Bulls want to see it complete without much of any damage. Then they want nice continuation on the bullish cycle that follows. This might take an hour to unfold and this is when we want that wimpy bounce. It would set up a nice shorting opportunity and our highest probability trades will happen when we are joining the longer term bearish trend. I feel that we will not see a substantial market rally until the downside is tested. Another attractive pattern would be a wimpy attempt at a gap reversal right on the open. Mixed overlapping candles that can’t fill the gap during this bearish cycle will be a sign of support. That move will attract short sellers expecting a repeat of Tuesday. Once the market finds support (bullish engulf, tails under body, bullish hammer, tiny candles) on that drift lower, shorts will be squeezed and there will be opportunities on the long side. These are two nice small opportunities that are possible today. If you catch either one, be satisfied and know that this might be all you get.
WE ARE IN PRE-HOLIDAY TRADING! Don’t expect a big move today!!! This is likely to be a range day with two-sided action. Pick your entry points very carefully and error on the side of not trading. Don’t piss your capital away. Unless you have at least 3 consecutive long candles in either direction, keep your size small. We need that momentum to increase our probability of success and we are not likely to get it.
This is likely to be an “inside day” with the low and high from Tuesday serving as support and resistance. The 50-day MA is in that range and we are likely to chop around it.