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Market Dip Will Be Brief - Bullish Speculators Were Flushed Out

Posted by Pete Stolcers on May 2

Posted 9:00 PM ET – Yesterday the market tried to push higher and the FOMC statement sparked selling late in the day. Fed officials remained dovish and they are in “pause” mode. Some analysts were looking for signs of a future rate cut. The S&P 500 closed on its low of the day and a bearish engulfing pattern can be seen on the daily chart. We should expect weakness early today and the bid will be tested as bullish speculators get flushed out.

Global official PMI’s were in line, but major economies are hovering just above contraction levels (50). QUALCOMM said that weakness in China will be seen in future quarters and their PMI was a little soft this week.

As long as domestic economic conditions are strong, investors will stay in the market. Q1 GDP came in much better than expected, but it is backwards looking. ADP reported exceptional job growth in the private sector during the month of April (275,000) and that bodes well for tomorrow’s Unemployment Report. ISM manufacturing was light (52.4) and that was a fairly sizable decline. It is still in expansion territory.

Rumor has it that a trade deal with China could happen in the next two weeks. That should be worth 25 S&P points in my opinion. Much of this news is already priced in. Trade negotiations with Europe and Japan will begin.

Earnings season has climaxed and mega cap tech stocks have reported. Sellers are typically passive until Apple reports. It posted better-than-expected results and the stock staged a nice breakout. Facebook, Microsoft and Amazon rallied after posting results. Google and Intel declined. The market needs other sectors to participate and tech can’t do it alone.

Swing traders bought the pullback yesterday when the SPY traded below $293. We will use a closing stop of $291. We can expect selling early today, but I am not expecting a major drop. These dips have not lasted more than a few days and the trend higher should continue.

Day traders should look for an opportunity to short early. After a big round of selling Wednesday, the downside will be tested. Wait for support, cover your shorts and go long. China and Japan are closed for trading so the action should be fairly light today. I don’t believe the Unemployment Report will have a major impact.

Look for a little weakness the next two days and a resumption of the trend higher.
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