Market Reversal Signals Trouble – Focus Is Still On Politics – Downside Will Be Tested
Yesterday the market rallied on a strong ADP report. Private payrolls increased by 262,000 during the month of March (much better than expected). Stocks shot higher and the SPY rallied above resistance at $236.50. There were signs of selling pressure early in the day and we saw a full-blown reversal. The reversal was bearish.
As I’ve been saying for the last week financials are the key to any rally. They opened strong and they faded instantly. J.P. Morgan Chase and Wells Fargo will report earnings a week from today.
Political uncertainty has the market on edge (Syria, Bannon and Gorsuch). Today Trump will meet with China’s President (Xi) and investors are nervous. Trump was very critical of China during his election campaign and the tone could be confrontational.
ISM services came in soft (55.2) and that was another reason to fade the rally.
Initial jobless claims have been creeping higher the last few weeks. I don’t believe that the Unemployment Report on Friday will be as strong as ADP was.
Global economic growth is improving and yields are rising. The Fed has an aggressive tightening agenda and a soft patch could spell trouble.
Earnings season will kick off and that typically attracts buyers. Q4 was strong and guidance was good.
Before the reversal yesterday I thought that good earnings and solid economic growth would shift the focus away from politics. Now I have my doubts.
Regardless of the reason, reversals like we saw yesterday need to be respected. We will see nervous trading today and the downside will be tested.
Swing traders should have stopped out of call positions when the SPY closed below $235. We never really got past the first leg of scaling into long positions and the damage should have been negligible. Option buyers need market momentum and we don’t have any currently. There isn’t enough technical damage to get short. On any decent market dip the next trade will be to sell out of the money bullish put spreads once support is established.
Day traders should watch for early selling pressure. I believe that the early rally will stall. Heated discussions with Xi could spark another wave of selling. I will be favoring the short side today. Use the first hour range as your guide. If we are above the high favor the long side. If we are below the first hour low favor the short side.
Support is at $234, $233 and $231.50. Resistance is at $235 and $236.50.
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