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Market Testing the 100-Day MA - It Will Hold and the Next Leg Higher Will Start

Posted by Pete Stolcers on February 13

Posted 9:30 AM ET – Friday the S&P 500 tested the 200-day moving average and buyers stepped in. A sharp reversal marked the capitulation low and stocks closed on their high of the day.

Yesterday we saw follow-through buying and the S&P 500 was up 35 points. The S&P 500 closed above the 100-day moving average and that is a positive sign. If you watched my video, you know that I expect $263.70 to be tested again on the SPY.

We saw some late day selling Monday and follow-through selling this morning. The S&P 500 is down nine points before the open. We want to see an early low today and we want the market to close on its high of the day. That would be a sign that Asset Managers see this as a buying opportunity.

The bottoming process should not take weeks to unfold. This drop was very sudden and the rebound should be quick as well.

The budget and debt ceiling were extended and this dark cloud has parted.

The Fed is dovish and only three rate hikes are expected this year. Powell (new Fed Chairman) wants a smooth transition and he will calm the market with dovish rhetoric.

Earnings have been excellent and guidance is strong. At a forward P/E of 16.5 the market is a little rich by normal standards, but profits are expected to grow a robust 17% this year.

Economic growth is also strong and Q1 GDP is expected to hit 5.3%. The CPI has not been a major economic release for the last decade. Inflation concerns will make it a focal point when it is released tomorrow. I’m expecting a relatively benign number. Oil prices have dropped and that will tame the number.

Swing traders should be long at the 200-day moving average. That is where we bought Friday and we need to let this bottoming process unfold. I don’t mind the market closing below the 100-day moving average, but I don’t want it to spend more than a few days there. I’m expecting us to test it and close above it today.

Day traders will have an opportunity to buy this dip. Let the market come in and wait for support. Once it’s established look for stocks that have relative strength. Watch the 100-day moving average on the SPY and use it as a guide.

The 12% correction last week was fast and furious. We should expect some nervous jitters while the market regains its footing. Once it starts to grind higher buyers will aggressively buy stocks. I’m expecting trading programs to kick in and that will fuel the rally. This week we have a monthly option expiration cycle and once the upward momentum is established it could be a catalyst.

Stay long.
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