Daily Commentary: May 29, 2020

Jeremy Engelbrecht1Option Commentary

Ride the Market Rally – Use This Critical Support Level As Your Guide – The Easy Money Has Been Made

Posted by Pete Stolcers on May 29

Yesterday the S&P 500 rallied right out of the gate and the light volume rally reminded me of a sellers boycott. Stocks were vulnerable to profit-taking and they sold off hard in the last hour of trading when President Trump announced a press conference. Investors sold on the news and China is in the crosshairs again. The S&P 500 closed lower for the day, creating a bearish hammer off of a relative high. We are seeing follow-through before the open this morning. The press conference timeline has not been disclosed and it will be the driving force today.

Tension between the US and China is increasing. Human rights issues, intellectual property theft and the Coronavirus cover-up have soured relations. China has imposed new laws on Hong Kong. England will open a pathway to citizenship for 300,000 Hong Kong residents if China does not back down and the US could retaliate with new tariffs from that area. Congress seems fully supportive. A trade war with China during a fragile global economic recovery could spell trouble for the market.

Global economies are reopening as the spread of the Coronavirus slows.

States are reopening and people want to get their lives back on track. Based on my own observations, I sense that there will be pent up demand. Consumer spending will determine the speed of the recovery and I will be monitoring it closely during the next month.

Asset Managers are buying equities and the market bid is strong. Money printing by central banks and government stimulus programs are providing a safety net for the market. I believe that stock valuations are currently stretched and that there will be disappointment during Q2 earnings announcements in two months.

Swing traders bought the SPY at $300 and they should use a stop below the 100-day moving average on a closing basis (evaluate five minutes before the close). We have been selling out of the money bullish put spreads on strong stocks to generate income and to take advantage of time premium decay. As the market stabilizes, option implied volatilities are declining and that is also advantageous for this strategy. Stock selection is critical and we will continue to see sector rotation out of tech and into the laggards. The “dogs are barking” and this is typically a sign that the rally is exhausted. I will ride the market wave higher, but I am ready to pull the plug at a moment’s notice.

Day traders need to tread cautiously in this light volume environment. After the huge market bounce there are stocks that can be shorted. In many cases valuations are stretched and stocks are technically weak. I am focused on trading reversals and there are opportunities on both sides. The price action today will be tenuous ahead of the press conference. Support at SPY $300 is critical and the 200-day and 100-day moving averages are also important. This is a technically significant level and we need to stay above support for a week so that it can strengthen. If the market falls below these major support levels the selling pressure will accelerate.

Look for choppy price action as global economies reopen. Consumer spending will be the key and we will gain clarity with each passing week.

The easy money has been made and I view this as a low probability trading set-up for day trading and swing trading. Reduce your size and trade count.

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