Daily Commentary: July 31, 2023

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Your Trading Game Plan For August

Posted by Peter Stolcers on July 31

This is how I see the month shaping up and how you should approach it.

PRE-OPEN MARKET COMMENTS MONDAY – The news was heavy last week and it will be heavy again this week. The market needs to breakout during this week or it will fall into a narrow trading range for the rest of the month.

The FOMC statement and earnings from MSFT, GOOG and META last week did not move the needle and the SPY is compressing near the 52-week high. The bearish engulfing candle on Thursday was largely erased Friday and the market will open slightly higher today. Gaps up to a 52-week high are often faded and I believe that the gap reversal last Thursday was largely caused by monthly rebalancing (T+3 settlement). The market made huge gains in July and balanced funds had to sell stocks and buy bonds. Once that selling pressure accelerated, sell programs kicked in. The bounce Friday indicated that buyers are still engaged.

I am expecting good results from AAPL and AMZN after the close Thursday. AI prospects will keep a bid to both stocks. Initial jobless claims have been good the last 4 weeks so the jobs numbers should be solid (JOLTS Tues, ADP Wed, Jobs Report Fri.). ISM manufacturing has been light and it is in contraction territory. Analysts are expecting a reading of 48. ISM Services will be posted Thursday and it is more important since 80% of our economic activity is service-based. It posted a big jump last month and it is clearly in expansion territory.

Once this wave of events passes, we will be in a news vacuum. Kids are heading back to school soon and everyone will be on holiday. The “rats” (politicians) will flee DC and the country will be on “auto pilot”. Fed speak will be minimal and they are in recess. Trading volume will dry up and traders will search for any headline they can sink their teeth into. This is a normal seasonal event. If you can take time off in the middle of August, I suggest you do. That is a great way to resist temptation in a low probability trading environment and you can decompress ahead of busy trading this fall.

We normally see some selling pressure in August and September. However, I am fairly bullish. In 2020 we were dealing with Covid-19 and we did not know the impact of a complete economic shutdown on profits. In 2021 we were still dealing with supply disruptions and inflation. In 2022 the Fed was tightening progressively. I don’t see any threats of this magnitude right now. The Fed is close to the end of their tightening and the economy has shouldered the most progressive jump in interest rates in decades. Inflation is starting to abate and the bank stress tests revealed that balance sheets are in good shape. That means that credit risk is fairly low. We had two large bank failures in March and if this was a wide spread issue, there would have been other banks in the crosshairs by now.

We don’t trade what we think is going to happen, we trade what is in front of us. The market is in a strong up trend. The climb has been orderly and there have been very few retracements of any magnitude. That is a sign that the bid is strong!!! The volume has been OK during this rally so the move is legitimate. Until we have a technical breakdown, we do not short. Use the D1 trendline that started March 13th as your guide. As long as the SPY stays above $444, dips will represent buying opportunities.

Your mindset needs to be that the market is not going anywhere in August. Rallies that look great are likely to fizzle out. Instead of buying the breakout, you have to set alerts and buy dips. Bullish speculators will be flushed out and buyers will return. That is when you enter and you need to take gains on the next leg higher. If you want to take a more passive approach, you can sell bullish put spreads once that dip finds support. Make sure that you do not see any organized selling (stacked long red candles on volume) during the pullback. This strategy allows you to distance yourself from the action and to take advantage of time decay during a dull trading month.

Big market drops rarely happen during a compression at a relative high. If the market surges higher (big move) we need to watch for a potential buying climax. A gradual float higher is not likely to produce violent profit taking. It is likely to continue the three steps forward, two steps backwards pattern.  

As we get through this week it will be critical for you to wait for the best set ups. I suggest doing more swing trading since the intraday ranges are likely to collapse.

This is your game plan for August.

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