Daily Commentary: July 26, 2023

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We Want A Bearish Reaction To the FOMC

Posted by Peter Stolcers on July 26

There will still be a few bullish weeks ahead. I am not overly concerned with a big drop until I see a buying climax. Here’s what to watch for.

PRE-OPEN MARKET COMMENTS FED-DAY – Traders will be scrutinizing today’s Fed statement. In particular they will be looking for any hint that they might pause in September. That would be very bullish. Employment is strong, wages have been ticking higher, the bank stress tests showed that balance sheets can withstand a recession, core inflation is very stubborn and the market is at a 52-week high. I do NOT feel that the Fed is going to raise false hope by suggesting that a pause is possible in September. They are going to keep the rhetoric hawkish so that they can tame inflation. In their own words, “they got inflation wrong last year and they will not make that mistake again”. Most Fed officials believe that there will still be one more rate hike after today in 2023.

The market is expecting a rate hike today and it is not likely to have much of a long-term impact on the market. If a pause in September is starting to get priced in and the rhetoric is hawkish, there will be a small pullback. Earnings season is in full bloom and those releases will carry more weight the next two weeks.

GOOG and MSFT posted results yesterday. GOOG was up and MSFT was down. They negated each other. META will post after the close today and AMZN will post after the close Thursday. AAPL does not post until August 3rd.

From a seasonal standpoint, the market bid typically remains strong for most of August. After earnings season winds down, some of the optimism fades and traders get nervous when the Fed is in recess. Short sellers are passive until mega cap tech companies have reported and they will get more aggressive after next week. Towards the end of the month we are likely to see some profit taking, particularly if the Fed’s rhetoric is hawkish today.

So how do we trade this? The market bid should remain decent for a few more weeks and then it will soften. Yesterday it tested the 52-week high and it has been compressing for the last six sessions. The gains have been preserved and I believe we will see one more leg higher. If we get that breakout, we could see a move up to SPY $462. Trade what is in front of you. That breakout is likely to have a few nice strong days higher and then compress. The further we get into August, the more passive I would be with bullish swing trades that span more than a few days. August is a big vacation month for everyone. The news and the volume will dry up. Price action is always the key. If we see nice stacked green candles on heavy volume, the move is strong and you can trust it more. If the move higher features mixed overlapping candles and light volume, you have to be very careful because those gains can easily be erased. Once a new relative high is established, a giant bearish engulfing candle on heavy volume or a bearish hammer would be a warning sign that we’ve hit resistance. That is likely to be a short-term top.

Most of you had really nice gains yesterday. Your goal is NOT to give that money back. That means you pick your spots very carefully and you do not chase. Given my comments this morning, your best scenario is a drop after the FOMC statement. You should still be in “buy the dip” mode. Instead of trying to short that move your brain should be telling you to search for the strongest stocks that are holding up well. When the market finds support, those stocks will shoot higher and the market will have the impetus it needs to make a new 52-week high when those shorts cover. You know that you have 2-3 more weeks of decent price action. When you see gaps up to a new relative high, you do not chase them. You know the bid will be tested and you wait for support before you buy. Eventually, one of those gaps up will be a reversal and it will result in a bearish trend day. The volume will be heavy and the candle will finish as a bearish engulf. That is when you temper your bullish bias and you go into more of a neutral mode. Bull markets die hard. After that first pullback we are likely to see support. Traders have been conditioned to buy dips. They will try to drive the market to a new 52-week high towards the end of August. That attempt will fail and we will see a lower high double top. Then you will know that a short term top is in. You can day trade from the short side, but until we break the up trendline on SPY, you should not swing trade from the short side. This price action is beautifully depicted by the movement we saw yesterday on an M5 basis.

I’ve given you the most likely scenarios to trade for the next month. Watch for a couple more weeks of decent price action. Don’t chase, buy dips once support is confirmed. As we get further into August, start watching for the warning signs I have outlined and pare back your long exposure. This is what the current D1 chart looks like and you can see the similarity to the M5 chart.

The futures are down slightly this morning. The euphoria over China’s accommodative policies only lasted a day and their market is down slightly. Europe is down pretty significantly so I would not look for an early bounce today. Remember, a boo-hoo reaction to hawkish Fed comments is what we want when they do not signal a pause in September. That move lower should be stubborn because buyers are still engaged and we want to buy that support once it is confirmed.

Support is at $452 and resistance is at $457.

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