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Market Gap - Merger Monday - Watch For These Clues In the Price Action Today

Posted by Pete Stolcers on September 14

Posted 9:30 AM ET – Last week the S&P 500 tested support at the 50-day moving average three times and that support held. Merger Monday is fueling a gap higher and the S&P 500 is up 40 points before the open. If the market is able to hold the gains and close near the high of the day we should see follow-through for a few more days. If the gains are easily stripped away it will be a sign that sellers are still anxious to take profits.

Gilead, Nvidia and Oracle are all engaged in acquisition talks. This will keep the market bid fairly strong throughout the day.

The Coronavirus is still very stubborn and we are averaging 4000 new cases per day. The good news is that the rate of acceleration has flattened out. AstraZeneca will resume its trial and Pfizer said that it could be distributing its vaccine in the United States before the end of the year. Based on my own observations, people are anxious to get their lives back to normal and the stores are busy.

The economic news this week includes Empire Manufacturing, Industrial Production, Retail Sales, Initial Jobless Claims, Housing Starts and the Philly Fed. None of these are typically market movers.

The FOMC statement will be released Wednesday and we can expect very dovish remarks. The Fed will be particularly cautious given that initial jobless claims are averaging 900,000 per week and that a stimulus plan is unlikely before the election.

Friday is a quadruple which and that typically increases volatility during the week.

Swing traders with a longer-term horizon should remain in cash. I believe that we will see additional selling pressure in the next two weeks and the market will test the 50-day moving average and perhaps the 100-day moving average. On a shorter-term basis, we took profits on our bullish put spreads last week and we are in cash. If the market rally this morning has follow-through it will be a sign that the bid is fairly strong. If the market rally easily gives up the gains, it will be a sign that sellers are anxious to take profits and that another leg lower is likely. At a P/E of 23, valuations are stretched and I don’t see any need to rush into swing trades until we have confirmed support a second time.

Day traders need to be cautious on the open this morning. Wait for the bid to be tested during the first hour of trading and watch for a possible gap reversal. If the market is able to find support, trade from the long side and focus on stocks with relative strength. If the market makes a new low for the day after two hours of trading, we are likely to see a bearish trend day and the selling pressure could accelerate. The market rally has been extremely strong the last five months and the first pullback is typically bought. That move could last a couple of weeks before sellers test the bid again. This is the pattern I was looking for last week, but I was surprised that we retested the 50-day moving average so soon. Consequently, I think that the selling pressure could remain fairly heavy. Stay flexible with your day trades and use the 1OP indicator as your guide.

Support is at SPY $332 and $337. Resistance is at $342.50 and $345.
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