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Market Is Compressing - Wait For A Breakout/Breakdown

Posted by Pete Stolcers on January 15

Posted 9:30 AM ET – The market has been compressing during a light news cycle. Buyers and sellers are paired off and we are at equilibrium. Earnings season has kicked off and this will provide clarity. Trading volume is declining and the market could go either way. We need to wait for a breakout or a breakdown.

Overseas markets inched higher after China said that it will lower the VAT tax and provide tax refunds to certain industries. Yesterday’s trade numbers from China were horrible. The PBOC has eased 5 times in the last year and their economy is still showing signs of strain. Trade negotiations with the US were extended by a day, but investors want another round of talks to be scheduled before the end of the month.

Citigroup posted earnings yesterday and the stock responded well. This morning Chase is down after reporting and so is Wells Fargo. A market breakout will only be possible if financials lead the charge. Banks will dominate the scene for the next two weeks.

England will hold a critical vote on Brexit later today. Theresa May believes that a rejection today would reverse the process and England will remain in the EU. The official exit date is only 10 weeks away. Watch for this news release if you are day trading.

There is Fed Speak throughout the week, but we don’t expect anything new. Fed officials have actively been speaking at conferences.

Earnings season will determine market direction. Pre-announcement warnings and guidance will be critical. At a forward P/E of 14.5, stocks are reasonably priced. Mega cap tech stocks typically attract buyers so the bid should remain decent for the next two weeks.

Swing traders are in cash. We did not short the SPY yesterday because the parameters were not met. We will wait on the sidelines until we have a breakout or a breakdown.

Day traders need to be cautious. Daily trading ranges are compressing and volume is light. Once the first hour range has been established, we are likely to stay in it. If the market breaks out of that range the next line of support/resistance is the low/high from the prior day. Use these technical levels as your guide and trade reversals off of the extremes. Trim your size and activity.

The price action should be choppy the rest of the week. Option implied volatilities are declining and option buying will become viable in a few more weeks if this compression continues.
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