Daily Commentary: April 18, 2023

Jeremy Engelbrecht1Option Commentary

Gap Up To A Relative High

Posted by Peter Stolcers on April 18

Let’s put this move into context. Is there a recent example that might be similar?

PRE-OPEN MARKET COMMENTS TUESDAY – The market continues to float higher in the absence of additional bank failures. The Fed added liquidity to the system and shorts were squeezed. That explains why the market has been able to move higher on very light volume. They have covered/adjusted positions, but this is not aggressive long-term buying on the part of Asset Managers. Go with the flow, but don’t overstay your welcome.

Earnings season will keep a decent bid to the market for a few weeks and we will see how much gas is left in the tank. National banks are posting good results, but the credit issues are more likely to reside at the regional level and we will hear from those banks the rest of the week. I am not expecting any “shocks”. Financials have been badly beaten down and this sector will provide support for the market as it bounces off of the recent lows. We will get a spattering of earnings across various sectors this week, but the major announcements crank up next week. NFLX will report after the close today and TSLA will report after the close tomorrow.

Stock valuations are fairly rich and the S&P 500 is trading at a forward P/E of 18. That is one reason why you don’t see FOMO buying on the part of Asset Managers. If they were allocating money into stocks in a major way, the volume would be heavy. The market rally has been narrowly defined and 8 stocks in the S&P 500 account for the entire gains for the index this year. That is not a healthy sign.

The economic calendar is light this week and global activity has been slowing down. The employment numbers are starting to soften (ADP, JOLTS and initial jobless claims). The jobs report is the only data point of the four that has been steady.

The next FOMC meeting is May 2-3 and the last statement was hawkish even after the bank failures. That is going to be a very important week since mega cap tech earnings will be released along with ISM manufacturing/service, ADP and the jobs report.

I still believe it is too early to buy on a longer-term swing basis. The low volume tells me that this bounce is vulnerable. You can trade the rally, but keep your size small. Your trade duration for swings should only span a day or two.

Day traders take a deep breath and look at an M30 chart of the SPY. You will notice many dips. Now look at the D1 chart of the SPY. You will see major horizontal resistance at SPY $417.50. Next, look at overseas markets. Europe had solid gains (.5%) and Asia was up slightly. There was not any major overnight news. This process is how you put the current gap up into context. Does this seem like a market that is going to “Gap and Go” or does this seem ling a market that could have a “Gap Reversal”? We know that the latter presents greater trading opportunities so that is the outcome I will be favoring. Look at the D1 SPY candle for April 4th. The market had been pushing the upper boundaries of the range and we had a nice gap reversal. Do not rush in and buy this gap up. We need to watch the price action. That gap fill on April 4th presented a nice opportunity to short and a nice opportunity to get long. Most days, the market has probed for support early in the day. Once the support is confirmed, we get a really nice bounce. This is how I would approach trading today. These scenarios might not play out, but they would certainly set up some great trading opportunities on both sides.

Support is at the low from Monday and resistance is at $418.35     

This example is similar to the one we have this morning. A gap up to a new relative high after nice gains and near a major horizontal resistance level.

Live Trading

Open an Account

Paper Trading