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Market Will Test the 200-day MA - Wait For That “Tell”

Posted by Pete Stolcers on February 6

Posted 9:30 AM ET – The upward momentum is strong and the market blew through the 100-day moving average on Monday. The S&P 500 is only 10 points away from challenging the 200-day moving average and it could happen this week. Resistance should be stiff at this level and the price action is likely to compress after a hearty bounce.

Earnings season is climaxing and the results have been excellent. Earnings per share are up 18% on average and that is well above historical norms. More than 70% of companies have exceeded estimates and that is also above average. At a forward P/E of 16, stocks are trading near the upper end of the valuation range. Mega-cap tech stocks have reported and sellers will be a little more aggressive.

The State of the Union Address was in line with expectations and there was not much of a market reaction. Politicians need to secure funding for the wall or the President will veto the continuing resolution next week.

England’s Parliament will vote on a new Brexit plant on February 14th. The March 29th deadline will not be extended so the noose is tightening. An exit without an EU deal would be ugly.

Trade negotiations with China will continue next week. The next meeting was scheduled immediately and that suggests progress. Trump will meet with Kim Jong Un on February 27th and there is some speculation that he might meet with Xi if the negotiations are going well.

The Fed has been dovish, but their tone might change now that the market has recovered. They have the flexibility to adjust their policy quickly and they still project two rate hikes this year. Bond yields tell us that investors don’t believe there will be any rate hikes in 2019. That means there is downside risk for the market. There will be “Fed Speak” this evening (I’m not expecting anything new).

Domestic economic growth is strong and ISM manufacturing (56.7) was strong, but below estimates. US job growth is very strong and wage inflation is minimal.

German factory orders for December were lighter than expected.

Swing traders should short the SPY if it trades below $270. Use $272 as your stop on a closing basis. I don’t believe the market is ready to roll over yet. It will test the 200-day moving average first. If it backs off quickly we might have a shorting opportunity. If it grinds higher and pauses we might see a compression between the 100-day and 200-day moving averages. This compression could last a few weeks.

Day traders should focus on the long side. The trading ranges have been very tight and you need to buy dips. The SPY is very close to the 200-day moving average so the upside is fairly limited. After a huge week of news releases the well has run dry. We are in a bit of a news vacuum. Earnings will still keep traders engaged, but we are wedged between two major moving averages. This is a good time to focus on individual stocks. I am expecting light volume (China’s market is closed this week) and tight ranges for the S&P 500 the rest of the week.

The market is likely to settle into this range.
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