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Market Bounce Feels “Toppy” - Use Caution and Set Stops

Posted by Pete Stolcers on January 10

Posted 9:30 AM ET – The news cycle is light and the upward momentum is showing signs of strain. Yesterday the market held early gains, but the price action was very choppy. The FOMC minutes suggested that the Fed might postpone future rate hikes and that it is reconsidering its balance sheet policy. This should have sparked a rally, but it didn’t.

Traders are looking for concrete information and the market won’t move higher until we have solid earnings (without reduced guidance), a trade deal with China and a softer tone from the Fed. All of these issues will take time to unfold and the news could go either way.

Samsung reduced guidance and the list of preannouncement warnings continues to grow ahead of earnings season. Citigroup will post earnings Monday and Chase and Well Fargo will post on Tuesday.

Trade negotiations with China seem to be going well and the meeting was extended. If another meeting is scheduled in the next week the market will view this as a bullish development.

The Fed can’t change direction on a dime, but they seem to be softening their tone. Fed chairman Powell and other Fed officials will speak this afternoon at the Economic Club of Washington. I believe the comments will have a dovish bias.

Domestic growth is strong, but it will falter due to weak global economic activity. China’s CPI fell to 1.9% and PPI grew at its slowest pace in two years. This is another sign that China’s growth is slowing. The silver lining is that it might force them to negotiate a trade deal.

Swing traders should take profits on the long position on the open this morning. The market should have reacted well to the FOMC minutes and the fact that it didn’t makes me nervous. This is a sign that resistance is stiff and that Asset Managers are looking to reduce risk on this bounce. I would like to see the market hold the gains and compress at this level for a few days. If it does, we will get back in.

Day traders should use a balanced approach today. Without any news to fuel the move in either direction we can expect a range. If the market is above the first hour high, focus on the long side. If the market is below the first hour low, focus on the short side. I believe that the range will be established in the first hour and we will stay in it the rest of the day.

Support is at SPY $251 and resistance is at $261. Look for choppy trading the rest of the week.
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