Daily Commentary: September 25, 2023

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I’m Not Bullish But I Am Expecting A Bounce

Posted by Peter Stolcers on September 25

Buyers and Sellers have been balanced the last two months and the drop the last few days is setting the table for a bounce.

PRE-OPEN MARKET COMMENTS MONDAY – The SPY has breached the upward sloping trendline, the 50-day MA, the 100-day MA, AVWAPQ and 1OP D1 is bearish. Overseas markets were generally lower and the S&P 500 is down 17 points this morning. It is testing a Low+ trendline from May 5th and a Low- trendline from June 26th (you need to view futures charts to see these lines). TLT is making a new 10-year low and it will weigh on the market today.

The economic news is fairly light. We will get the third estimate for GDP and that is not typically a big market mover. Friday, the PCE will be released. Although this metric is used by the Fed to gauge inflation, this is the third revision, so it is not likely to move the needle much.

Last week the FOMC rhetoric remained hawkish. There was nothing new in their statement, it was just a splash of cold water and investors were reminded that interest rates will stay “higher for longer” and they are still considering one more rate hike this year.

The debt ceiling is weighing on the market and the odds of a government shut down are increasing. A few months ago, Fitch downgraded our bond rating for exactly this reason. It has become a political pinata. The process is “ugly” and the continuing resolutions are brief so we have to deal with this constantly. We could see a shutdown, but an agreement will be reached at the 12th hour. The longer it takes to reach a deal, the greater the likelihood that the market will drop.

With all of these negative influences, we should be bearish – right? My bias is currently bearish, but not overly so. The Fed is close to the end of the tightening cycle and we have “weathered” the storm. The greatest threat from the hikes was a credit crisis. We are not seeing any additional bank defaults so that risk is subsiding. Economic growth remains solid. Earnings have been good, but valuations are a little “stretched”. The market has been in a trading range the last 3 months and the news the last week has not changed the backdrop. A government shut down is possible, but a deal will be reached.

We were going to breakout of the wedge formation one way or the other last week and the price action was very compressed. Even before the breakout I mentioned that we were not likely to travel far in either direction. I believe that the SPY could test the 200-day MA in the next two weeks, but it should find support there. These are the final weeks of seasonal weakness and then we will shift to a period of seasonal strength. Earnings season will start and that will calm nerves. I’ve been doing this for a very long time. August is dull, September and the first half of October are weak and mid-October into January are strong.   

On a very short-term basis, the market has had steady selling the last 3 days. There was a good chance that we would see a bounce Friday that might last a few days, but the selling we saw late in the day tells me that we have not established support yet. Buyers are not going to stick their necks out until we have a higher low double bottom and we need to stack some intraday green candles on volume. The day has to finish on the high and then we should get a brief bounce that lasts a day or two. If you look at the D1 SPY chart, you can see the pattern. The height and duration of that bounce will tell us how aggressive sellers are. If DC continues to “play chicken” with the debt ceiling, that bounce will not last long and the next wave of selling should test the 200-day MA.

Will we see that support today? I doubt we will see stacked green candles and a gap reversal today. Why? The selling Friday was aggressive with lots of stacked reds late in the day. Overseas markets were down overnight and bonds are making a new low. Today I believe we will see a wimpy drop with mixed overlapping candles and fairly light volume. It will take a while for support to form and I would hold off on day trading any longs until we see a higher low double bottom with decent volume and nice long green candles on the first bounce. If you are a more conservative trader, wait until we are in the gap. If it takes longer than an hour to establish the low of the day, today is not going to be the day we find support. Day trade shorts, but keep them on a short leash knowing that a bounce is close.

The underlying theme is that we need to stay in short-term trading mode. Expect two-sided price movement and day trades and limited overnight swing trades are the way to go.

Support is at the 200-day MA and resistance is at the 100-day MA.

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