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MarketSmith powers the charts in this video.

After some back-and-forth choppy price action for most of last week, most stocks finally had a high-volume range expansion on Friday. Can this be the beginning of a year-end rally or it will be just another oversold bounce that will fold quickly? We will know soon enough. 

It all depends on interest rates and the US dollar. If they continue to pull back, this stock rally can continue. The job numbers crushed estimates on Friday (336k vs 170k estimates). The algos sold the initial number in the pre-market session. It was the final flush. The indexes started to recover shortly before the market opened and didn’t look back. The Nasdaq Composite and QQQ gained 1.6% of high volume, led by cybersecurity, software, and semis. Small caps were up 1% on decent volume too. 

Later in the day became clear that the payroll report was not as strong as the headline numbers suggest. Only 23k jobs were full-time. The rest were part-time and self-employment gigs. What matters is the market reaction and the existence of setups to buy. Unlike other follow-through days in the past couple of months, this time there are some decent setups to choose from. Some examples – CRWD, PDD, ZS, PANW, VRT, NTNTX, XPO, META, INTU, GWRE, ANET, SNPS, MOD, SPOT, etc.

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MarketSmith powers the charts in this video.

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We saw a light bounce from oversold levels in the indexes. Now, the question is if we can see a follow-through day next week. This scenario is still in play despite the weak close on Friday. 

The stock market has been in a correction since August. The only time most stocks bounced in the past couple of months is when interest rates pulled back. The correlation is crystal clear. It is all about interest rates until the next earnings season starts which is in about 3-4 weeks.

It’s hard to trust any rally for too long unless rates start to really come down. The 10-year yield is in a notable uptrend, which is a major headwind for equities. This doesn’t mean that we can’t see short-term bounces in stocks. We saw one in late August. It lasted a couple of weeks and then cratered. We potentially saw the beginning of another last week. Let’s see how long it lasts. Those frequent changes in direction can make you dizzy. This is why I keep saying this is not the time to be aggressive on both the long or the short side but it also doesn’t mean that I am not taking advantage of select short-term trading opportunities. One has to be super nimble and operate with a scalpel in this environment. I rather operate with a mega tractor but now it is not the right time for it.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary, real-time market education, the Momentum 40 list of market leaders, and much more. See what subscribers say about my educational service.

Check out my free weekly email to get an idea of the content I share with members. How my ideas/alerts did.

I published a new trading book recently (2023). Check it out on Amazon.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.

MarketSmith powers the charts in this video.

September is seasonally weak but the real reason behind market weakness lately is the market waking up to the reality. The selling accelerated after the FOMC meeting this week. The Fed didn’t say anything new. The market finally realized that the Fed is not bluffing about keeping rates above 5% in 2024 to fight inflation. This is what caused the selling in stocks and the breakout in rates. The Fed has no reason to cut rates before inflation gets to a 2% handle for multiple months, unemployment spikes, or the indexes have a substantial correction. 

The S&P 500’s YTD VWAP and 200-day moving average are both around 420. This is also the level from which SPY started its big summer rally back in late May. It’s a big level and I wouldn’t be surprised if it gets tested soon.

After last week’s selling, sentiment is overly bearish. People are even talking about meltdowns and the 1987 scenario. Such a view is contrarian most of the time, but one has to be open to all scenarios. The market tends to surprise the consensus opinion. If you are short, you better be nimble and take profits often and quickly. The same concept applies if you want to get long in this tape. It is still not an environment where one should be overly exposed or aggressive in any direction. Being tactical, using small position sizing, and keeping drawdowns small will lay down the foundations for much faster account growth during trending tapes.

Keep in mind that nothing goes straight down. Even if the current correction accelerates, there will be violent bounces along the way. This is why I say don’t short in the hole – chase extended names. Obvious breakdowns are likely to shake you out before any further downside. Wait for a bounce near a declining moving average. This doesn’t improve our odds of success but at least we can enter with a tighter stop and get better risk to reward which can give us an edge.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary, real-time market education, the Momentum 40 list of market leaders, and much more. See what subscribers say about my educational service.

Check out my free weekly email to get an idea of the content I share with members. How my ideas/alerts did.

I published a new trading book recently (2023). Check it out on Amazon.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice. Read my full disclaimer here.