This will only be a bounce. Do not load up on bullish positions. Here’s how to approach your swing trades.

PRE-OPEN MARKET COMMENTS FRIDAY – The SPY has broken out of the wedge formation after the FOMC statement Wednesday and the 100-day MA has been breached. This is a nice technical breakdown and it tells us to favor the short side. How should we trade this?

You know from my comments this week I expected a breakout, we just did not know which way. Since June the market has been trapped in a horizontal trading range and the price action has been choppy. Is this the start of a new trend? Can we expect downward follow through?

The Fed said that another rate hike is possible this year and they told investors to expect “higher for longer”. These are hawkish statements, but they are consistent with what they’ve said in the past. The market just did not want to hear it. There is nothing new and I do NOT believe we will see sustained selling until the backdrop changes.

What might be some of those material changes? An sharp drop in economic activity, a credit crisis or a big drop in core inflation are examples of the type of news it would take to get the market trending strongly in one direction. The news this week did not pack that punch.

If you look at the D1 chart of the SPY for the last year, you will see that two stacked red candles with little to no overlap are rare. A year ago we had the Fed hiking rates at a 75 basis point clip at every meeting. The economy could have taken a nose dive and no one knew what the repercussions of sharp interest rate hikes might be. In that environment, stacked red candles were justified.

I am expecting a choppy drift lower. We are going to respect the technical breakdown. That means we short bounces when they hit resistance and we take gains on deep drops. During the next bounce we evaluate the height and duration of the move. If the bounce is brief and shallow, we know there is stiff resistance and we look for an entry point to establish short positions. If the bounce is tall and long, we know that buyers are interested and we have to be more cautious shorting. We repeat this analysis until we start breaking above technical resistance. Then we shift gears. This is the market pattern we are in.

With regards to the action today, a nice gap down would have been a gift. I would have bought that expecting a gap reversal and a nice rebound. The last part of the move yesterday was largely program driven and the drop was more of a buyers boycott than heavy selling. I expected a bounce on the open and we are getting one. Given the recent selling pressure, we will probe for support early. This bounce will be tested. Mixed overlapping candles and light volume during the bid check are signs that buyers are still around. If more than half of the gap is preserved, we are going to bounce and go higher. Either way I believe we are due for a bounce today.

Does this mean I am bullish? It does today. This will be an oversold bounce. How high we go and how long it lasts has yet to be determined. I am still bearish on a swing basis so I am only looking to day trade this bounce. DO NOT LOAD UP ON BULLISH SWING POSITIONS!!!

If you are a swing trader, you take gains on shorts and you wait on the sidelines for the bounce to run its course.

Resistance is at the 100-day MA and support is the low from Thursday.