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Buy/Short These Stocks and Watch This Technical Level Today

Posted by Pete Stolcers on September 10

Posted 9:30 AM – Resistance at the all-time high is stiff and the market is likely to trade in a tight range until the FOMC next week. The ECB is expected to ease this Thursday and the market has priced in a US rate cut of 25 basis points a week from tomorrow. Central bank easing is attracting buyers and short-sellers will be passive ahead of the news.

US/China trade negotiations have stalled, but investors are hoping that the tension will ease so that face-to-face negotiations can resume in October. Rumor has it that China wants the US to ease restrictions on Huawei and to cancel the upcoming tariff hike on October 1st. In exchange, China will commit to buying more grain. This demand could be a prerequisite to the meeting. Both sides know that a trade deal before the 2020 election will not happen and they will pacify investors with ongoing meetings.

Brexit has been delayed until January 31st and Boris Johnson has little control over the situation. His only recourse is to try and forge an agreement with the EU in the next few weeks before he resigns. From a market standpoint this dark cloud (hard exit) has temporarily parted.

Global economic conditions continue to slip, but activity in the US is strong on a relative basis.

Stocks are trading at the upper end of their valuation range (forward P/E of 17). Resistance is stiff at the all-time high. Historically low global yields are forcing investors to stick with equities. That means the bid will be strong at major technical support level (SPY $282). There are many cross-currents and the SPY is likely to trade in a range between $282 and $300 the rest of the year. I believe that the SPY will trade between $294 and $298 ahead of the FOMC statement next week.

Swing traders should stay in cash. We don’t want to buy at the upper end of the range and we don’t want to short ahead of the FOMC statement. The best swing trading strategy is to stay on the sidelines.

Day traders should watch for support at SPY $297 this morning. That was the gap up last week and if that support fails the market will try to “fill”. This breach would provide a shorting opportunity. If support is established at $297 we are likely to bounce. I believe the ECB statement on Thursday will keep buyers engaged. This is the most likely scenario today and I have a slightly bullish bias today. Use $297 as a guide.

We saw a rotation out of tech and into cyclicals yesterday. If this continues today, short tech stocks on a breach of SPY $297 and buy cyclicals on a bounce off of that support level.
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