Beware Gap and Fade but Bulls Running

Another day, another gap and fade.  Markets opened just under 3% higher on the hope of more stimulus and an unexpected May Retail Sales beat.  However, as usual of late, traders then sold off hard to begin the all-day volatile rollercoaster.  The day ended on a last-minute climb giving us black-bodied candles with long lower wicks across the board.  (You decide whether you want to call them Hanging Men.)  On the day the SPY gained 1.86%, the DIA gained 2.06%, and the QQQ gained 1.72%.  VXX fell back to 36.87 and T2122 climbed back into the overbought territory at 93.75.  Oil (WTI) closed up as energy led markets most of the day, ending at $38.11/barrel and the 10-year bond yield rose to 0.75%.

Fed Chair Powell downplayed the $750 billion corporate bond-buying program when he testified before the Senate Tuesday.  However, he also signaled that the backstop was in place and that when markets weren’t buying up the bonds, the Fed would step in (i.e. let the market determine the pace of Fed purchases).  The part that may scare traders is when he said if the market continues to improve, the Fed would be happy to slow or stop buying.  So, he promised a backstop…not additional buying pressure.

On the Virus front, the global headline numbers are 8,287,295 confirmed cases and 446,667 deaths. The big news is a UK study that found a cheap steroid that improves the survival rate of the worst cases by 30%.  This is great news, but preliminary as another study found that the previously touted hydroxychloroquine may actually reduce the effectiveness of Remdesivir (the only treatment proven to help). In Brazil, the virus rages out of control as they reported over 34,000 cases on the day (an increase of 66% over the Monday).  Meanwhile, China is continuing the fast clamp down on the new outbreak, including more intensive testing of imported meat after it was discovered a majority of the recent cases were people who were processing imported salmon.

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In the US, we now have 2,208,486 confirmed cases and 119,133 deaths reported to date.  TX has seen a 66% increase in virus cases since Memorial Day, including yet another daily high in new cases Tuesday.  FL also saw a 3.6% increase in cases on the day.  However, CA saw only a 1.4% increase, the smallest increase in cases in that state in 3 weeks.

In the US, we now have 2,182,979 confirmed cases and 118,286 deaths reported to date.  23 states have seen an increase in cases over the last week.  TX reported its 6th record-high number of hospitalizations in the last week on Monday, but the increase was lower than the 7-day average increase.  CA saw a decrease in positive test results (to 4.5%) as of last Friday.  Meanwhile, AR Governor Hutchinson issued executive orders protecting businesses in the state from virus liability. 

Overnight, Asian markets were mixed, but mostly in the green.  Japan and India being the 2 that showed red, but South Korea, Taiwan, Singapore, and Shanghai were all barely on the green side.  Europe is showing a similar situation with the big 3 (FTSE, DAX, CAC) up between half and one percent.  However, some of the minor bourses (Greece, Finland, and Sweden) are in the red, while some of the others are not that far into the green at this point in their day.  At 7:30 am, US futures are pointing to another gap higher of between 0.5%-1.0%.

The major economic news for Wednesday includes May Building Permits, and May Housing Starts (both at 8:30 am), Crude Oil Inventories (10:30 am), Fed Chair Powell testifying (12 pm), and FOMC Member Mester speaks (4 pm).  However, there are no major earnings announcements at all on the day.

It’s still early, but as of now, we’re looking at another significant gap this morning.  The gap higher at the open should take us back to challenge Tuesday’s highs.  If we can clear that, we’ll be back in the Island Reversal gap.  Stay focused on the short-term chart.  However, the bulls seem to be calling the tune this morning.  As always, don’t chase, don’t predict, and don’t be greedy (take profits and move your stops as you go).

Ed

There are no Trade Ideas for today. However, be aware that the normal distribution of trade ideas has been moved to the trading room and the Members-Only Phone App in the future anyway. Trade your plan, take profits along the way, and smart. Also, don't forget to check for upcoming earnings. Finally, remember that the stocks/ETFs we mention and talk about in the trading room are not recommendations to buy or sell.

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