The SPY is going to test horizontal support at $444 from March 23rd. We have touched that level a few times and a breach below that level will trigger sell stops. The down trendline that started on March 29th is still intact and the SPY is below the 100-day MA and the 200-day MA. That suggests that we should favor the short side. The S&P 500 is down 25 points before the open today.
Earnings season starts Wednesday and all of the other issues plaguing the market will take a temporary “back seat” as analysts gauge profits. Guidance will be critically important. Consensus estimates are for earnings to grow 4.7% year-over-year. According to JPM, we would have negative earnings growth if we exclude energy stocks.CPI will be released Tuesday and analysts are expecting a reading of 1.2% – wow. If that happens it has to be a drag on the market. China posted its PPI overnight and prices increased a whopping 8.3% Y/Y.A 50 basis point rate hike in May is gaining traction among Fed Officials.
I have NOT advised swing traders on an SPY position because I do not have a sense for market direction on a 3-4 week basis. I suspect that earnings season will prop up prices for a few weeks, but my level of conviction is low. I feel that the selling pressure will increase the closer we get to the May FOMC meeting. This Friday is monthly options expiration and we have seen selling pressure 9 of the last 12 months (last month was one of the exceptions) ahead of the event. I feel that SPY $420 support is strong and I want to see the SPY stage an impressive bounce before we test $430. This type of bounce would confirm support and it would provide the confidence I need to take very short term bullish swing trades (a few days in duration) during earnings season.
Day traders should wait to see what happens at the SPY $444 level. If we blow through it on the first attempt, we are likely to see follow through selling. Sell stops will be triggered and it is important that the breakdown gains traction during the day and that we close below it. If we breach that support and we rally above it making a higher low double bottom, support will have been confirmed and that move would have just been to trigger sell stops. Much of the trading action is program driven right now.
How do you trade this $HIT? You keep your size small and you wait for short term trading windows to set up. From March 16th to the end of the month, we had an opportunity to trade from the long side. The candles were overlapping (weak trend), but they were green. Since the start of April, the selling pressure has returned. A hot CPI tomorrow and selling pressure during monthly expiration week have me leaning short side now that we are below the major MAs. I am not overwhelmingly bearish, but I would favor that side. Look for the weakest sectors. Semi-conductors (XSD) and industrials (XLI) look weak. I also like being short Chinese stocks (FXI). On the long side energy (XLE), utilities (XLU) and healthcare (XLV) have been the strongest.Support is at the 50-day MA and SPY $444. Resistance is at the 200-day MA and the 100-day MA.