Daily Commentary: May 07, 2020

Jeremy Engelbrecht1Option Commentary

Buy Back the SPY Short At This Price – I’m Not Bullish – We Will Wait For A Technical Breakdown

Posted by Pete Stolcers on May 07

The market is waiting for signs that the global economy is ready to reopen. There isn’t much clarity and Asset Managers are latching on to any information they have. China’s exports exceeded expectations and that has attracted buyers this morning. The S&P 500 is up 45 points before the open and resistance at SPY $288 will be tested again.

China’s exports rose 3.5% (-15.7% expected) from a year ago and imports fell 14.2%. Much of this increase was related to a backlog of orders that resulted from the shutdown. Medical supply exports could have contributed as much as 3% to the number. China’s shutdown has ended, but comments from international companies suggest that consumers are still very cautious. President Trump is evaluating if China has lived up to the trade agreement reached in December. Global stock markets are fragile and any trade war talk would lead to selling. The US, Japan and Europe plan to reduce their reliance on China and India has been courting these nations. China is responsible for the Coronavirus outbreak and there will be repercussions.

Earnings season is not giving us clarity. Many companies are not providing guidance and in almost every case they have indicated that Q2 will be much worse than Q1.

The economic data points are questionable. Government agencies are lightly staffed and businesses are closed. The one report that I believe is reliable came yesterday. ADP processes payrolls for small and medium-size businesses and they know how many direct deposits they made in April. According to their statistics, 20.2 million jobs were lost in the private sector during the month of April. This morning we learned that weekly jobless claims increased by 3.17 million bringing the seven week tally to 33.5 million. I believe that 40 to 50 million people lost their jobs in April. Tomorrow’s Unemployment Report will be weaker than any we’ve seen before.

While many states are reopening, some are electing to extend the lockdown (New Jersey). I believe that fear remains high and that consumers will hold onto their money until they know that their jobs are secure. When I go to the store and I see everyone wearing masks I sense anxiety. Costco reported that same-store sales were down 1.8% in the month of April year-over-year. Shoppers stocked up in March and they are not returning.

The speed with which companies reopen and consumer confidence will determine market direction. I believe that both components will lag market expectations. Optimism is priced into the market as states reopen and we will see how quickly countries around the globe can recover. Observations and data points over the next few weeks will be very important.

Swing traders are short the SPY at $287. Place an order to buy back this position at $287. If you are not filled, cover the position at the close today. I am early to this short and we will wait for a technical breakdown. I still believe that the next move is down. In this week’s Swing Trading Video I highlighted two bullish put spreads and two bearish put spreads. We are likely to get filled on the bearish put spreads during this opening market rally – we will not get filled on our bullish put spreads. Our overall risk exposure is very low. We have many out of the money naked puts that we sold and you should buy them back for pennies. We are in a holding pattern until we have evidence one way or the other.

Day traders should wait for support this morning. Gaps higher have been very difficult to trade. Relative strength is masked by the early move higher and we’ve seen the upward momentum transform into a very gradual drift higher. Our best chance for an early round of winners would come off of three consecutive long red candles in the first 30 minutes of trading. This would allow us to find relative strength and we would be able to buy on support. We have seen late day selling pressure the last two days. I may be a relatively passive trader this morning if we run higher and then float upward for the first five hours of trading. If you look at the chart from Tuesday (May 5th) I believe that is the pattern we will see today. If I don’t get the pullback on the open I will try to buy a few stocks with relative strength. I will keep my size small and I will set passive targets. If the strength continues I will look for a dip in the afternoon that I can buy. The bottom line is that I can’t get a good read on what the price action will be today. The market has been stuck in a trading range for the last few weeks and I am seeing two-sided price action. There are buyers and sellers. After the open I will use the 1OP indicator to help me determine market direction. Use SPY $288 as your gauge. If we are above it, they were the long side. If we are below it, they were the short side.

The market will stay in the sideways trading range until we have clarity. It will take a few weeks to determine if businesses are reopening and if consumers are ready to resume their previous lifestyles.

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