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Market Will Hit An Air Pocket and Snap Back - Wait For That Pattern

Posted by Pete Stolcers on October 10

Posted 8:30 AM ET – The S&P 500 is been able to maintain support at the 50-day moving average. Bonds are slipping this morning and the S&P 500 is down 5 points before the open. I still believe there is room on the downside and we will patiently wait for the capitulation low before we load up.

Rumor has it that a Brexit deal is close at hand. The market likes trade deals and Europe can shift its focus to the US once this is signed.

A full-blown trade war with China is likely. Both sides are moving farther apart and a “Cold War” with our largest trading partner is unfolding.

Earnings season will start Friday when major banks post results (JPN, WFC and PNC). We are still two weeks from the climax and the market bid should remain strong.

Domestic economic releases have been excellent, but there are signs of slowing global activity.

The S&P 500 is trading at a lofty premium relative to emerging market P/Es. This spread is at a 10-year high and it is likely to contract. Either US stocks will become cheaper or emerging market stocks will rally. This disparity could take many months to resolve. At a forward P/E of 17, stocks are priced for perfection.

Swing traders should be in cash. If the SPY trades below $281.50, buy it when it trades above $282. This probably won’t happen today, but I want to have an order ready. We are going to wait for that air pocket and a sharp reversal off of the low. Once we get that we will buy. Right now we have to let this current round of profit-taking run its course.

Day traders should use the first hour range as a guide. If we are above the high, favor the long side and if we are below the low, favor the short side. Also use the 50-day moving average as your guide.

Earnings season and year-end strength will attract buyers. Once the low has been established the bounce will be fast and furious. I will be looking to buy at the 100-day moving average if we get that low.

Start lining up strong stocks and be ready to buy. This selling will not last more than a week.
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