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Big Market Sell-off. Now What?
www.oneoption.com
The S&P 500 broke major technical support levels yesterday. Here’s what to expect today.
PRE-OPEN MARKET COMMENTS THURSDAY – We have been expecting this pullback. Yesterday I told you that big gaps down tend to stick and that the likelihood of a down “Gap and Go” was high since the market was near an all-time high. I hope you made a lot of money on the biggest move of the year!!
There is “blood in the water” and buyers are going to be passive. They saw the carnage yesterday and they are not going to pull their wallets out until they are sure there is support. In fact, they have been passive during the last leg of this rally. That’s why the volume has been light. The move higher has been fueled by speculators and trading programs (not long-term buyers). Some Asset Managers are net sellers. They want to lock in gains and those who feel that interest rates are going down will rotate money into bonds.
This morning we got our first look at Q2 GDP. The economy grew at a rate of 2.8% and 2% was expected. That is an improvement from 1.4% last quarter. Durable goods orders plunged, but if you strip out transportation, the number was inline with expectations. Durable goods orders are volatile and I don’t give the reading much weight. Initial jobless claims were 235K (as expected). The market had little to no reaction to the numbers.
Tomorrow we will get the first look at the PCE deflator. That is the Fed’s preferred measure of inflation. Next week will be busy as far as economic releases (ADP, JOLTS, ISM manufacturing, official PMIs and the jobs report).
The FOMC statement is next week. Bond futures are pricing in a rate cut in September. The economy is stronger than expected and inflation has been easing. There is no reason for the Fed to cut rates and I believe the market will not get what it wants.
What did we learn yesterday? Google taught us that big tech companies have to fire on all cylinders (YouTube ad revenues missed). Great news is priced in and any weakness will be sold. Tesla taught us that no matter how good the pipeline is, the current quarter matters. To this point, many chip makers have been given a free pass based on the future of AI. Keep your perspective. AAPL, AMZN, MSFT and META have not reported and those earnings are on deck next week.
How should we day trade today? After a heavy round of selling, the market will try to bounce this morning. I would consider any bounce a gift. When this move stalls a great shorting opportunity will present itself. I am not looking for another bloodbath today, but we are likely to at minimum test the low from Wednesday. If we get a nice pop on the open, that could leave room for a 20-30 point drop. That will be your best trading opportunity. The rest of the day I would expect to see relatively choppy trading with a negative bias. If we take out the low from Wednesday and we stay below it, we could drift lower in a choppy, stubborn manner. Stocks that convincingly breached major technical support levels yesterday on heavy volume will be your best picks.
How should we swing trade? Our window of opportunity is setting up. If the market can’t recapture the all-time high after all of the news next week, it is going to drift lower in August and September. This is the most likely scenario, but we have to wait for resistance to be confirmed. Next week will be like trying to drink water out of a fire hydrant. After that, the news will completely die down and we will go into a news vacuum. Seasonal weakness and lofty valuations will keep a lid on the market. I believe this is going to play out, but we have to make sure. We do not trade based on what we think, we trade based on what we see. What if the other four mega cap tech stocks rally? What if the Fed signals they might have room to ease in September? The market bid has been incredibly strong since November and picking market tops is what rookies do. We need confirmation that resistance is firmly intact and we will get that information next week. Provided that all of this plays out, I would be favoring the short side in August.
Support is at the 50-day MA and the 100-day MA. Resistance is at the high from Wednesday.
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