Daily Commentary: June 02, 2023

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Nice Market Breakout – Watch For This

Posted by Peter Stolcers on June 02

This is a nice market breakout and a “Gap and Go” is likely. Here’s why.

PRE-OPEN MARKET COMMENTS FRIDAY – The S&P 500 is up 25 points before the open. The Senate passed the debt ceiling and President Biden will sign the bill today. The jobs report was strong and that is a sign that economic growth is stable. The market has been able to poke through a key resistance level and the price action over the next two weeks will be important.

From a technical standpoint, we don’t just want to poke through these resistance levels, we want to blow through them on heavy volume. We need escape velocity from this level or risk getting sucked back into the range. As good as this breakout looks and feels, remember that there will be many bullish speculators who are buying the breakout and they are “weak hands” that can be flushed out.

In less than two weeks the FOMC statement will be released. There is almost a 50% chance for a 25 basis point rate hike and officials have been vocal about not pausing. The CPI will be posted just before the rate decision and inflation has been running way above the Fed’s target. The ECB has stated that they are going to hike on 6/15/23. The strong jobs report this morning will give the Fed breathing room to hike rates.

In the month of May, 339K new jobs were created (210K expected) and hourly wages rose .3%. Initial jobless claims and ADP were strong yesterday so they are consistent with the jobs report.

It is important to keep some of the headwinds in mind when the price action looks so bullish. Inflation is hot and more rate hikes are coming. Many banks might not be positioned for higher rates and they are already on the “ropes”. Jaime Dimon said that regional banks should be prepared for 1 – 1.5% higher rates. Forward P/Es are stretched at 18 (SPY) and 28 (QQQ). A dozen mega cap tech stocks have accounted for all of the market gains this year. China’s economic activity has been very sluggish and it is the world’s second largest economy.

I like the price action and the SPY breakout, but not enough to swing on a longer term basis. I suggest day trading with some overnight swings. On days when the market drops early, support forms and those have been excellent entry points for longs.  

This morning the market is going to gap up. I view the news as solid across the board. We have a debt ceiling deal, strong jobs and a reasonable increase in hourly wages. Overseas markets were particularly strong with gains in the 1.5% range overnight. I believe we could see a gap and go this morning. Most gaps up have been faded, but this one is likely to hold. I would scale into longs early if 1OVol M5 is > 0 and if the first few candles are green. No need to chase. Let’s make sure the gains hold. If they do, we could see an early burst higher for 90 minutes and then a compression. If the first few candles are red and the volume is light, I would hold off on longs. Wait to see if we fill in some of the gap. This is actually our best scenario because we will have time to find longs and we could have a better entry point. This looks like a clean breakout through the 1OTL trendlines this morning.

Support is at the high from Thursday and resistance is at $430.

This is a nice clean breakout for the SPY and it is above our automated trendlines.

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