Market Will Drop Early Today – Selling Will End Soon – Stay Long
POSTED BY PETE STOLCERS ON MARCH 14
Yesterday the market gaped up and it made a new relative high on the open. These moves have been dangerous for bulls and most of them reverse. Once the downward momentum is established, buyers pull bids and bullish speculators get flushed out. This is a normal process and we are likely to see more selling this morning. Don’t trust the opening gap higher.
After a 10% market correction we should expect nervous trading. Interest rates are moving higher and they are providing a headwind. As long as the 50-day moving average is intact we will weather this squall.
The macro backdrop is bullish. As I outlined in my comments yesterday inflation (wage and price) is not a concern. This will give the Fed breathing room and they won’t be forced to hike four times this year. The FOMC meeting is a week from today and we can expect a .25% hike. This move is already priced into the market.
Economic growth is incredibly strong. The jobs numbers last week (ADP and the Unemployment Report) were robust. ISM manufacturing and ISM services numbers were excellent. This morning China posted strong growth (industrial production, retail sales and GDP).
Earnings have been excellent and valuations are at the upper end of the range (not in bubble territory). Stocks need a little time to grow into their forward P/E’s.
Swing traders should be long calls. Use the 50-day moving average on the SPY as your stop on a closing basis. The market got a little ahead of itself and some of the “fluff” is going to come out this week. Once support is established the next leg higher will begin.
Day traders should look for an opportunity to get short early in the day. A bearish engulfing pattern had formed on a daily chart and that is never a good sign near a high. Reversals like the one we saw yesterday have follow-through. The market won’t rally until the downside is tested today and buyers will be passive. I believe the market will find support at SPY $275 (above the 50-day moving average). Look for opportunities to get long later in the day if the lows are established in the first few hours of trading.
The macro backdrop is excellent and this is merely a dip.
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