Daily Commentary: August 21, 2023

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This Bounce Will Provide Valuable Clues

Posted by Peter Stolcers on August 21

Here’s what I will be watching for this week.

PRE-OPEN MARKET COMMENTS MONDAY – I need to preface my market comments with… it’s August. There is a negative seasonal bias and the news/volume dry up. We have seen selling pressure this month and technical support levels have failed. I am neutral to slightly bearish, but the market does not go straight up or down. I am expecting a bounce and it will tell me how aggressive buyers and sellers are.

A meager bounce that only lasts a few days and that features mixed overlapping candles on light volume will tell me that the selling pressure is still fairly heavy. I want to see SPY $445 preserved (AVWAPQ) and ideally we stay below $444. If I see this price action, I will be ready to reload shorts and I will look for opportunities to sell OTM bearish call spreads.

A nice robust bounce on good volume that marches right through $445 with stacked consecutive green candles and heavy volume will tell me that buyers are eager at this level (especially if the bounce lasts well into next week). That scenario would suggest that the 50-day MA is going to hold and I would be looking to sell out of the money bullish put spreads. I would be more cautious with this strategy (sell fewer spreads) because I sense a fairly stiff market headwind.

The S&P 500 is trading at a forward P/E of 18 for 2024. That is fairly rich on a historical basis and there is downside room for the market. Bond yields are rising and the Fed is steadfast. On Friday we will hear from Jerome Powell (Jackson Hole Conference) and his comments are likely to splash cold water on the market. We know they are hawkish from the FOMC minutes last week. China’s economic growth has been soft and credit concerns are increasing. The PBOC just lowered rates another 10 basis points and they told banks to make more loans. I remember Congress lowered lending standards in 2005 for home loans. Making bad loans to stimulate economic growth increases the odds of a credit crisis.

I suggest day trading more this week and watching this bounce very closely for the price action I referenced above. NVDA reports after the close on Wednesday and in a light trading environment it is likely to have an impact on the market.

This morning we are going to get a nice little bounce. Asia was generally weak and Europe was up. There is not a tailwind this morning and this feels like an oversold bounce. Day trade based on the intraday price action and trade either side. Expect a dull day and keep an eye on the volume. If it is above average, we have a chance for movement.

Support is at the 100-day MA and resistance is the 50-day MA. 

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