The price action since August has not been strong. Trend is higher, buy dips.

PRE-OPEN MARKET COMMENTS WEDNESDAY – The first sentence in my comments yesterday was NOT to chase higher opens. The odds of a reversal were high. Be patient and wait for a dip and signs of support. The month I’ve sounded like a broken record and this theme has been repeated over and over. The dips since August have been fairly deep and the rebounds have featured light volume and mixed overlapping candles. That is a sign that the market is NOT going anywhere fast. There is no reason to chase stocks.

If you waited patently Tuesday, the market had a substantial initial drop. It was not able to bounce to VWAP and that was a sign that the selling pressure was steady and heavy. This turned out to be a bearish trend day and all of the gains from Monday were erased. Although this resulted in a D1 bearish engulfing candle off of the all-time high, it was not particularly daunting. The drop was news related. The decline had good volume, but there were many mixed overlapping candles. The range was also not big enough to suggest relentless selling. I view the retracement of Monday’s gains as more of a “buyers boycott” than I do heavy selling.

ASML reported earnings a day early and that weighed on tech stocks. They missed on the topline and the guidance was soft in all areas NOT related to AI. That includes chips for phones, cars, PCs and other electronic devices. They said that the supply disruptions from Covid-19 created a lot of demand for their equipment and that inventory levels are back to normal. ASML makes the equipment used by chip makers and Cap-Ex by chip makers has leveled off. TSM reports earnings before the open Thursday and that will be an important release. It will either be consistent with ASML or it will demonstrate that chip makers are still doing well. It will be difficult for the market to have any substantial year end rally without strength from the tech sector (regardless of who is elected).

Initial jobless claims will be an important number tomorrow as well. It came in at 258K last week and any number over 250K will raise concerns. Tomorrow retail sales will also be released and that will help us gauge consumer strength.

Pros could have shorted after a few hours yesterday, but trading against the trend is not what the vast majority of you should be doing. If you patiently waited for your buying opportunity yesterday, you didn’t trade. You should be proud that you resisted temptation. You might not have made money, but you didn’t lose money. The drop yesterday helped you to identify strong stocks. They preserved prior breakouts and they barely pulled back. You spent the day setting alerts and your time to buy will come. When it does, you will make 2-3 days worth of gains because you will be armed with the strongest stocks and you will have a market tailwind. Your odds of success will be high and you will be able to trade with confidence.

Overseas markets were down slightly overnight. It could take an hour for the market to find it’s footing. As someone who is looking to buy a dip, I would prefer to get the selling pressure out of the way early. A nice drop and an immediate bounce on good volume with a handful of green candles would give me the confidence I need to start buying. This is the preferred pattern. An initial move higher would be a bit more dangerous to buy because of the selling pressure yesterday. If the market has mixed overlapping candles during the bounce I would be suspicious of it. At some point the bid will be tested. If this plays out, we want most of the gains to that point preserved and VWAP should remain intact. Wait for that dip. We also want to see a series of green candles, not just one or two. That would suggest steady buying. If the market does test the downside first, you have to patient. You want to see support at the low from Tuesday.

Today might present and opportunity to buy a straddle or strangle on SPY/QQQ overnight. This is a stealthy little window during an otherwise boring week. If TSM disappoints, initial claims come in high and retail sales are soft, the market will drop. If they all come in strong the market will rally. There are enough news events to spark a move either way and the market will be paying attention.

From a swing trading standpoint, I would only have starter longs on at this stage and I would swap these positions out once the momentum has stalled. This will keep your overnight risk exposure to a minimum.

Support is at the low from yesterday and $577. Resistance is at the high from yesterday.