This Is A Buying Opportunity – We Need This Pattern First!
Posted by Pete Stolcers on October 3
Yesterday the market continued its slide from Tuesday and it broke through horizontal support at SPY $294 and the 100-day moving average. The uptrend line from May is the next level of support at SPY $288 and the 200-day moving average represents major support at $283.50. If we test it I’m expecting it to hold.
A weak ISM manufacturing number sparked the selling Tuesday. What happened to the “bad news is good news” crowd? ISM manufacturing was soft last month and it fell into contraction territory. It did spark a little profit-taking, but that quickly reversed two days later when a robust ISM services number was posted. The service sector accounts for 80% of economic activity versus 20% from the manufacturing sector. At 10:00 AM Eastern time ISM services will be posted and it is a critical number. The forecast is 56.0 and that would be strong. The Unemployment Report will be released tomorrow.
If the economic data is weak we will see initial selling and we could test SPY $283. I like buying at that level. The Fed is ready to ease if needed and that will keep a safety net under the market. Earnings season is about to start and the results should be good. Pepsi posted solid results last night and Costco will report tonight. Typically buyers are engaged heading into earnings season. Tech stocks have been pounded and that leaves room for upward movement.
Face-to-face trade negotiations with China will resume next week and we could sign a trade deal with Japan. On the negative side, the WTO granted the US rights to impose tariffs on the EU because of tariffs levied on Boeing. Trump took immediate action and increased tariffs on scotch, wine and cheese. Airbus will take most of the low and a 10% tariff will be imposed on its planes. This could hurt some airlines that are about to take delivery of new Airbus planes.
Boris Johnson submitted his plan for an EU exit agreement yesterday. It addresses the Irish border issue. He claims that if there is not an agreement in the next two weeks a hard exit on Halloween will happen. I’m not sure how he can pull this off since it would be unlawful.
Swing traders should have exited the SPY for a $6.00 loss on a half position yesterday when the SPY closed below the 100-day moving average. We will try to enter on the next pullback. Place an order to buy a full position at SPY $284. Our stop on a closing basis will be $280. I like selling bullish put spreads out of the money below technical support on stocks with relative strength. Focus on the stocks that I posted in last night’s video. We want to see a deep intraday low and a sharp reversal off of support. That will result in a long tail under the body of the candle (bullish hammer). When we see that pattern on a daily chart we can get more aggressive with our bullish put spreads and we can buy stock. Put premiums are elevated and that makes this strategy even more attractive. I still see this market pullback as an opportunity.
Day traders should expect more weakness. The market will probe for support. Pay close attention to the ISM services number posted after the open. It will set the tone for the day. If the market starts drifting lower today it will test the 200-day MA. We need to see that capitulation low. Two consecutive long green candles (5 minute basis) that close near the high of the bar would signal a bottom. Another possible formation is a deep low and a retest that results in a higher low (double bottom higher low). If there is nice follow-through this pattern would also signal a bottom. Until we see these patterns, assume that there is more downside to come. I am only focusing on the long side. Many stocks are oversold and they are poised to bounce. These moves can be violent. I will wait for a buying opportunity so that I can focus on the rebound.
Support is at $283.5 and $288. Resistance is at $291.50 and $294. ISM services is critical and I suggest being sidelined for the number. Watch the reaction and join the momentum.
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