This Is The Key To the Next Market Drop
Posted by Pete Stolcers on March 6
The market has been compressing in a very tight trading range for two weeks. Resistance is stiff at SPY $281 and major support is at $275. A trade deal with China and a dovish Fed policy is priced in. The market will continue to compress until we have a new catalyst.
Earlier this week the Wall Street Journal outlined the details of a probable trade agreement with China. The S&P 500 surged on the news and immediately retreated. This is a sign that a trade deal is completely priced in.
China’s market has been rebounding on good news. In addition to the trade news, the MSCI index will quadruple its holdings in Chinese stocks. The PBOC has eased 5 times in the last year and China plans to reduce a 3% VAT. Additionally, fiscal spending on infrastructure will increase. China is pulling out all the stops to reverse the current economic downturn. One of the Premiers forecasted that 2019 growth will be .5% below last year’s growth.
Europe’s economic activity is grinding to a halt. Italy is in a recession and Germany narrowly avoided one. Brexit is only three weeks away and a hard exit is possible. UK officials are trying to secure a guarantee from the EU that border checks in Ireland will not be imposed. Theresa May said that she is not expecting an answer before the weekend. Even if the EU agrees, she still might not have enough votes in Parliament to avoid a hard exit.
The Fed is dovish, but officials want interest rates to return to normal levels. If the market treads water for a couple of months they will be emboldened. Most officials expect to hike one more time (at least) this year and the market is not pricing in any rate hikes. Any surprise favors the downside.
Domestic economic growth is strong. ISM services came in with a whopping reading of 59.7 yesterday. The market was not able to rally on the news and that is a slightly bearish sign. This morning, ADP reported that 183,000 new jobs were created during the month of February in the private sector. This was slightly below estimates (190,000), but it is still a solid number.
The market will be able to tread water as long as domestic economic releases are stable. If our activity starts to slip, profit-taking will surface. The market survived this round of economic releases. We will get more numbers during the month, but this was a major news week.
Swing traders should short the SPY if it closes below $278. This will only be a half position and we want to make sure that it is closing below that minor support level.
Day traders need to watch the ranges. Monday we went from $281 to $278. That was the most activity we’ve seen in a while. As long as we are in this range, expect choppy trading. Yesterday we were not able to get out of the first hour range and that was a major warning sign for day traders. It means that there is no momentum and that you have to use passive targets (scalp). Fade the extremes and trim your size/activity. If the market is able to get out of the first hour range you can get a little more aggressive.
The news is fairly light and the market will compress at this level. We’ve tested horizontal resistance at $281 and both times the market was smacked down. It has not rallied on good news and there is a slightly negative bias. Don’t get aggressive with shorts unless we breach $278.
Market commentary provided by OneOption, LLC a firm separate from and not affiliated with Regal Securities L.P. Regal Securities L.P. has not participated in the creation of the content, and does not explicitly or implicitly endorse the content.