In Thursday’s commentary I suggested that the market would follow any big reaction to the XLF ETF and suggested the following course of action should a big move occur.
“So how should you use this opportunity to have one day potentially tell us so much about the market, based on one simple ETF?
- Carefully – There is a chance that it will not move at all. The opportunity is that if it does have a big move, then you’ll know it could be an important indicator throughout earnings season.
- Patiently – Don’t assume the open will provide “the answer”. Where it closes the day is more important. In fact, how it follows through beyond Friday’s range will ultimately be what you want use as your market indicator going forward.”
One big take away from Friday is that the talk about earnings season is that the numbers are going to be strong. This sets the market up to be easily disappointed.
So while earning season is sounding like a “positive”, we need to be very cautious of any significant down momentum.
The next step after Friday’s weakness is to see if the market follows through to the down side in the XLF and the general market.
Like Friday, don’t read too much into the open as it is now complicated by the U.S. attack on Syria Friday night.
The attack on Syria was well timed if Trump was considering how the market would react, but I’m certainly not suggesting this was a consideration by his administration.
It was well timed because the initial market reaction to the attack would be to drop because of the fear and uncertainty of “what’s next”.
However, the weekend has enabled traders to digest the news, and hear that the intention is not to escalate the attacks.
As a result, I would not be surprised if the market opens higher on Monday, but I’d prefer a lower open because that would test the resolve of the bulls.
Here’s my plan for Monday…
Friday’s reaction in XLF was bearish so if Monday trades under Friday’s lows and under its 30-minute O.R. this could be quite bearish.
However, the reaction to Syria will factor into the Monday open by exaggerating any gap.
If the reaction is negative, a lower gap open could be a head fake. If the market gaps down and then trades over its O.R. high and over Friday’s low, I’ll look for the O.R. low to be the low of the day.
If there is a gap up that is over the floor trader pivots in the general market indexes, could lead to big up day based on the ideas that Syria attacks are no longer an ‘unknown’ and the market is done selling off based on the banks earnings.
However, a gap up that trades under its O.R. low is a bearish condition.
In short, a decent sized gap in either direction should not be trusted, but could probably be traded in the direction of its O.R. breakout.
If there isn’t a significant gap then I’ll be neutral and not inclined to expect much of a trend until the market trades over the floor trader pivots or under the Friday low.
If the market moves beyond Friday’s range, it’s set up for a big trend day in either direction.
S&P 500 (SPY) Look for resistance at 266.75-267. Key support at 263.
Russell 2000 (IWM) 156 is big resistance. Look for support at Friday low and 152.
Dow (DIA) Levels to focus on are 246.50, and then support at 241.40 and235
Nasdaq (QQQ) The 50-DMA is 164. Initial support at 161 then 160 and 159.25. Then 153 is the big low level.