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Short Covering Bounce Will Continue - News Is Balanced

Posted by Pete Stolcers on January 7

Posted 9:30 AM ET – Last week we saw some signs that buyers are starting to nibble. The market drops were “jerky” and it was harder to make money on the short side. We did not hit any deep air pockets with late day plunges. On Friday we saw a massive short covering bounce. The news has been mixed and we are in the process of forming a base. Massive drops like this take time to resolve. I’m not expecting an instant rebound and a new high anytime soon. Asset Managers are not worried about missing the next big rally.

On the positive side of the ledger China and the US will engage in trade negotiations this week. The optimism is high and Trump feels that he has the upper hand because domestic economic conditions are strong.

The Unemployment Report Friday showed that 341,000 new jobs were created during the month of December. That is an incredibly strong number. Wages rose .4% and that is “hot”. It will keep the Fed in tightening mode.

China posted a strong services PMI (Caixin) and the PBOC reduced bank reserve requirements for the fifth time in 12 months. More easing is expected and we could see fiscal stimulus.

Theresa May will try to get a Brexit vote next week and it could go either way. I see this as neutral until the actual vote.

The government shutdown is also neutral. Over 75% of the government is operating and this is not having a major economic impact.

On the negative side, China’s Caixin manufacturing PMI fell into contraction territory and so did their official PMI. Previous easing from the PBOC has not kept their economy from slipping. Buyers loaded up on inventory ahead of proposed tariffs and that inventory glut needs to be worked off. I’m expecting soft economic numbers the next few months out of China.

Domestic manufacturing (ISM) fell more than expected, but it is still in healthy territory. ISM services will be reported today after the open.

Apple warned that it would miss earnings by a wide margin. The stock dropped 10% on the news and it dragged the technology sector down. Federal Express, Micron Technology and Oracle all lowered guidance when they posted a few weeks ago. Earnings season is around the bend and we could get more warnings this week.

Fed Chairman Powell spoke last Friday and the market construed his comments as being more dovish. I did not see any material change. The Fed will remain flexible and they will adjust their policy if needed.

I attribute the massive rally on Friday to short covering. On Thursday Apple posted its warning and the market fell through horizontal support. It looked like we could challenge the recent low and bears loaded up. When a number of positive news events (Unemployment Report, Caixin services PMI and “dovish Fed speak”) were released Friday the market shot higher and bearish speculators ran for the exits.

Swing traders should be in cash. We covered our short position on the open Friday and that was a smart move. We were short the SPY at $247 and we covered at $247.50 (.2% loss). I view the current environment as neutral. Earnings season is approaching and that typically attracts buyers. However, we could get a number of warnings. The trade talks in China and Brexit could go either way. We are going to wait for a clear sense of direction before we take another position. Cash is King.

Day traders should use the first hour as a guide. The downside will be tested early and I believe that support will be established in the first 90 minutes. The market should be able to grind higher after that. If we are above the first hour high, get more aggressive with your long positions. Support is at $250 and $251. Resistance is at $258.

This base will take a few months to form.
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