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Wait For Support - Watch This Critical Level Today - Market Will Try To Close Near It

Posted by Pete Stolcers on October 2

Posted 9:30 AM ET – Yesterday stocks sold off after ISM manufacturing dropped to 47.8. That is a substantial decline from the previous month and it is in contraction territory. Economic weakness abroad could be spreading to the US and that has investors nervous. ISM services will be posted tomorrow and it is a much more important number since it accounts for 80% of our economy activity.

ISM manufacturing has been drifting lower for months. Four weeks ago it was in contraction territory and that sparked temporary selling. Two days later, ISM services was posted and it was a particularly robust number. I’m expecting the services sector to hold up well tomorrow.

ADP reported that 135,000 new jobs were created in the private sector during the month of September. That is below the 165,000 forecast and it might bode poorly on Friday’s jobs report. I’m not overly concerned about it since it is just one reading. Major holidays impact unemployment reporting and I will be watching for revisions to the August jobs report Friday.

The Fed is prepared to ease if necessary and that should keep a decent bid to the market. Global yields are at historic lows and that is pushing investors out on the risk curve. They need to own equities to preserve purchasing power and to generate a reasonable rate of return. Central banks are easing and that provides a safety net for the market.

Credit markets are a little tenuous lately, but there are not any major issues. The overnight repo situation from two weeks ago seems to have been resolved. Japan had its worst bond auction in three years and that also raises a brow. As long as credit conditions remain stable the market will move higher.

Earnings season will start shortly and there have not been many pre-announcement warnings. Stocks are trading at the upper end of their valuation range (forward P/E of 17).

Trade negotiations with China will resume next week and we could sign a deal with Japan. Both are bullish events.

Boris Johnson will submit a final proposal to the EU today. A hard exit seems to be off the table after Parliament ruled it to be unlawful.

Swing traders are long a half position of SPY. This morning we will test the 100-day MA. We will use that as our stop on a closing basis. I want to be long into earnings season and if we are stopped out we will wait for support and reload. I still like selling out of the money bullish put spreads on stocks with relative strength. We have been selling these spreads below technical support and as long as it holds – stay in the position. The SPY is likely to close at or above 100-day moving average today. I still view this as an attractive level to scale into long positions.

Day traders should let the market come in this morning. The selling has been fairly steady and it will take time for support to be established. Watch for two consecutive long green bars (closing near the high of the bar) off of an intraday low. That would be a very bullish sign and you should trade from the long side if you see it. I will also be watching for a higher low double bottom with a follow-through rally back above the 100-day moving average. I’m much more interested in buying than selling. Tech stocks have been beaten down and I am seeing some good opportunities there. If the market makes a new low after two hours of trading I will favor the short side.

The news is not that dire and I’m expecting a bounce with a close near the $292 level. Make sure that support has been established before you take new long positions.
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