The Key To the Market Is the Financial Sector – Use XLF As Your Guide
Yesterday the market bounced and it was fairly quiet for the first half of the day. Traders were nursing a holiday hangover and the action was light. Late in the day buyers stepped in and the S&P 500 finished just below the 50-day moving average. In my comments I told you to watch financial stocks. They are the key to any rally and they were strong yesterday.
The first part of the earnings cycle is dominated by banks. This sector has been beaten down and most of the stocks are resting near major support levels. Interest rates are on the rise, employment is improving, economic activity is solid and consumer confidence is high. These are all bullish influences and financial stocks should catch a bid. One day does not make a trend. We need to see follow-through buying this week. Morgan Stanley and Goldman Sachs are on deck.
Stocks tend to rally into earnings season. Bears don’t want to short ahead of mega-cap tech stock announcements. I’m expecting market support through April.
Trump wants to take another shot at a healthcare bill. That will postpone tax reform and investors are growing impatient. This was a bearish development last week.
In my comments yesterday I mentioned that the jobs report and ISM services were soft. Those two numbers don’t concern me. I still believe that economic growth is intact. China’s industrial production, retail sales and GDP exceeded estimates. We need strong economic numbers when central banks are tightening. Any soft patch will spark selling.
Swing traders should focus on bullish put spreads. Wait for solid earnings announcements and a positive reaction. Make sure that there is strong support between the short strike price and the price of the stock. If that support is breached by back the put spread. This strategy will allow you to distance yourself from the action and you’ll be able to take advantage of time decay. The market has plenty of crosscurrents, but overall I believe it will be able to maintain current levels during the next few weeks.
Day traders should be patient this morning. Let the early wave of selling run its course. If financial stocks are holding up well relative to the overall market prepare for a bounce. I will be trading from the long side if this scenario unfolds. If the market makes a new low after two hours of trading we are likely to test support.
Support is at the low from Thursday ($232.50) and resistance is at SPY $235 ( 50-day MA).
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