Market Reversal Wednesday Was A Warning Sign – Selling Pressure Building
The market has been very nervous this week and the selling pressure is building. Wednesday’s gangbuster ADP report was not enough to attract buyers. After a big opening rally stocks reversed and they have not been able to recover. That reversal was a warning sign and support at SPY $235 will be tested this morning.
Only 98,000 jobs were created during the month of March. As I mentioned in my comments I thought the Unemployment Report would not be able to match private sector job growth reported by ADP. Initial jobless claims have been creeping higher the last few weeks and I’m not surprised by the miss. ISM services also came in light this week.
The Fed has an aggressive tightening agenda. They plan to reduce their balance sheet and yields are rising. Global interest rates are moving higher and the market can only advance if economic growth is strong. Any “chink in the armor” will spark profit-taking.
The political landscape is also uncertain. Good news was priced in after the election and the honeymoon is over. The healthcare bill never made it to vote and Republicans are divided. Investors are growing impatient and many question the administration’s ability to get a tax cut approved. Yesterday President Trump met with China’s leader (Xi) and the statements after the meeting were benign. A missile strike was launched in Syria and that is also adding uncertainty.
Earnings season will start next week. Buyers are typically engaged ahead of announcements, but the market bid is weakening. Profits and solid guidance might not be enough to keep the market afloat.
As far as the Unemployment Report is concerned, I don’t trust. The government is inept at everything it touches and this is just another example. ADP actually processes payroll checks for small and medium-size businesses and they have their finger on the pulse of the labor market. It is the only number I watch.
In terms of the overall tone of the market, I believe we are going to see a pullback in the next week. Support levels are being challenged and we are seeing late day weakness. Watch support at SPY $234.40. That is the 50-day MA. The next support level is the low from two weeks ago at $231.50.
Swing traders should keep their powder dry. We need to see sustained technical weakness before we can shift to bearish strategies. The long-term and intermediate term market trends still point higher. Any dip will present a buying opportunity. I don’t want to short the market and I don’t want to get long either. On a market decline I will wait for support to be established. Then I will sell out of the money bullish put spreads. Earnings season might not spark a big rally, but it will keep the market from rolling over.
Day traders should use SPY $234.40 as a guideline. I will be trading from the short side and I would like to see an early bounce that stalls. If we get above SPY $235, I will use that as my entry point when we fall back below it. I will take profits at the 50-day MA if we pause there and I will reload if we fall below it. The first hour range is also very useful. If we are below it I will be more aggressive with my shorts.
The backdrop is very tenuous and earnings season doesn’t really crank up for a couple of weeks. I believe we are going to see some selling during the next week.
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