This market rally looks great if you just look at the price action. However, the light volume tells us the conviction is low. Much of this bounce is short covering and not aggressive buying.

PRE-OPEN MARKET COMMENTS FRIDAY – The market has been able to grind higher and preserve its gains the last few weeks (no retracement). Yesterday it broke through a D1 trendline and it is within striking distance of horizontal resistance at SPY $417.50. The volume has been light the last few weeks, but it did improve yesterday.

The CPI came in slightly better than feared and so did the PPI. Those were two potential speedbumps. The thought is that they might pave the way for a Fed pause. Economic activity has been showing signs of strain domestically and abroad. This morning Retail sales fell 1% and a -.4% decrease was expected.

Banks posted earnings this morning. They are all trading higher and the badly beaten down financial sector will not be a drag on the market today. Credit fears reside mainly at the regional level and we will hear from those banks next week. With regard to credit concerns, confidence builds with every day that passes without another failure, but that confidence can be shattered in an instance. This explains the light volume rally we’ve seen.   

I don’t trust this light volume rally. It reminds me of the one we saw in August of 2022. These gains can quickly be stripped away because buyers have been passive. We know this from the light volume. Sellers have also been passive and that is why the market has been able to move higher on light volume. I suspect that some of this move is short covering vs an actual desire to be long. When the Fed stops tightening, money will start to flow into bonds. Yields will be attractive when inflation slows and that will keep a lid on the rally. At a forward P/E of 18, stocks are not cheap. A recession looms and we are seeing tighter credit conditions and soft economic data. Given this backdrop, buyers will not be aggressive as we approach technical resistance levels. I still believe that longer term swing traders need to be passive.

Day traders will have an opportunity to get long at some point today. Our ideal set up is a wimpy move lower that preserves SPY $412. We want to see mixed overlapping candles and light volume on that drop. Once support is established, buyers will return. They demonstrated their interest yesterday and we had decent volume on a D1 trendline breach. This is our most desirable set-up, but it does not mean we will get it. We could see an instant bounce higher on the open. 1OP is on a bullish cycle. Typically when we have a trend day, we will see some profit taking late in the day. Yesterday those sellers did not move the bid in the last 30 minutes of trading. That tells me that buyers have some conviction. I would not be inclined to chase if this scenario unfolds, but I suspect it will. Back-to-back bullish trend days are fairly uncommon. These gains need to be digested and that typically means that we will see two-sided action. As long as the volume stays above average, we will have good trading conditions today. Our worst case scenario today is an early pop that hits resistance and then sparks a round of profit taking. That move lower reenters the range from Thursday and the volume dries up. This would result in a low volume “Inside Day”. Consumer Confidence will be released 30 minutes after the open and it is not typically a big market mover.

Support is at SPY $412 and resistance is at $417.50.