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Watch For These Day Trading Patterns - The Market Needs To Test the Bid This Morning

Posted by Pete Stolcers on June 29

Posted 9:30 AM ET – Last Friday the market gapped lower and the selling pressure was persistent right into the closing bell. The market closed on the low of the day and I believe that some of this decline was related to the end of the quarter adjustments (sell stocks and buy bonds). Given T+3 settlement, I believe that bearish influence has run its course. End of month/beginning of month fund buying and the upcoming holiday should provide some support. I don’t believe that the market will have a meaningful rally this morning until the downside has been tested.

The SPY closed on its low of the week and it closed below the 200-day MA. This is another retest of that support level and I could make equally compelling arguments why the market will head higher or lower. This is a low probability trading environment and we need to wait for clear signs of market direction. Keep your trades small or stay entirely in cash. I get daily questions from traders on what they should do with losing positions. Obviously they are not paying attention to my comments. Do Not Swing Trade!

From a bullish perspective, the printing presses are running at full speed. We can expect additional quantitative easing and additional fiscal stimulus if the recovery starts to stall. The holiday and end of month fund buying should attract buyers and the bid is usually strong into earnings season. The economic data points a month ago were better than feared and we will get another read on employment conditions this week (ADP and the Unemployment Report).

From a bearish perspective, new Coronavirus testing is showing that the percentage of positive tests is starting to rise. That is concerning because it means that the increase in new cases is not simply due to increased testing. This percentage had been hovering around 4.5% and it has risen to 14% in Texas. Consumers are cautious and that will mean that the recovery will take longer. China is the litmus test because they reopened in April – they should be hitting stride now. This morning I read that the Dragon Boat Festival showed that activity was down 49% year-over-year and that revenue was down 69% year-over-year. Consumer spending is the key to the economic recovery and I view this small piece of information as very significant.

China has only bought 19% of its Phase 1 2020 target from the US in the first five months of the year. Only 3% of the energy products have been purchased and this could spark harsh rhetoric from Trump.

Swing traders need to be extremely selective in selling out of the money bullish put spreads at this juncture. You should only have a couple of positions on and they should be expiring this Thursday or a week from Friday. This short duration allows us to take advantage of accelerated time decay and it gives us an opportunity to reevaluate market conditions on an ongoing basis. Last week we added two bullish put spreads (MSFT and CHWY). We had a WMT bullish put spread from the week before. All three positions are out of the money and we will not be adding at this time. I believe that buyers and sellers are paired off and that the market will be trapped in a range the rest of the summer. Once support at SPY $300 solidifies we can lean on it during earnings season. We will be waiting for market support and we will be looking for companies that post excellent results and that move higher after reporting.

Day traders should be very patient on the open. Wait for the bid to be tested. Once support has been established, buy stocks with relative strength. Mondays have typically been lackluster and I don’t believe we will see a big move either way. Traders will square up ahead of major economic releases and they will trade off of those numbers Wednesday and Thursday. Pre-holiday trading volume typically wanes and I consider this to be a low probability trading environment. Tread cautiously and look for the patterns that I highlighted in last Friday’s video. If you are trading the open, look for consecutive long green candles closing on their high with very little overlap. We want to see those stocks run through the prior day’s high and we want to see relative strength. Enter these trades in small size and set passive targets.

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TRADE THESE DAY TRADING PATTERNS – VIDEO
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The recent spread of the Coronavirus and the tepid recovery in China are warning signs. I was slightly bullish and my bias is shifting to neutral.

Support is at SPY $291.85, $295 and $297 and $300. Resistance is at $307.50. Use the 200-day moving average is your day trading guide today.
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