Consolidation Continues As 2022 Ends

Markets gapped higher at the open Thursday as the SPY opened 0.79% higher, the DIA opened 0.61% higher, and the QQQ opened 1.13% higher.  All three major indices then saw a morning follow-through to the upside reaching the highs at about noon.  Then the doldrums took over as the entire market traded sideways in a very tight range and on low volume all afternoon. The SPY and DIA both did manage to climb back above their T-line, with the DIA also crossing back above its 50sma and the SPY gapped up through the support level it failed Wednesday.  This action is giving us white-bodied candles with small wicks at both ends.  The DIA is also a Bullish Harami signal.

On the day, all ten sectors were in the green with the Technology sector (+3.08%) leading the way higher as the Consumer Defensive sector (+0.55%) lagging behind.  Meanwhile, the SPY was up 1.78%, the DIA was up 1.07%, and the QQQ was up 2.44%.  At the same time, the VXX was down 1.26% to 14.13 and T2122 climbed out of the oversold territory into the mid-range at 47.47.  10-year bond yields fell back down to 3.826% and Oil (WTI) is down fractionally to $78.70 per barrel.  So, overall, it was a bullish, low-volume day in a downtrend consolidation.

In economic news, the Weekly Initial Jobless Claims came in exactly as expected at 225k (versus a forecast of 225k and last week’s reading of 216k).  Later in the day, the EIA Weekly Crude Oil Inventories came in unexpectedly higher than forecasted, with a build of 0.718 million barrels (compared to a forecasted drawdown of 1.520 million barrels and the prior week’s drawdown of 5.894 million barrels).  EIA also said that gasoline inventories fell unexpectedly by 3.1 million barrels (compared to an expected inventory build of 520k barrels). Meanwhile, distillate (diesel and heating fuel) inventory unexpectedly grew 282k barrels (versus a forecasted 2.05 million barrel drawdown).

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In stock news, Thursday morning, Elon Musk told TSLA employees they should not be bothered by “stock market craziness” (like TSLA being down 70% on the year).  That may be a tougher sell to higher-level employees who get part of their compensation in stock options.  Musk also urged them to “go all out the next few days” to make TSLA Q4 numbers look as good as possible.  Later, the Wall Street Journal reported that AAPL iPhone production is starting to catch up with demand.  The paper reported that the situation is far from normal (due to waves of covid cases), but at least it was better than in November when workers were rioting to get out of the main production facility (in order to avoid infection).  Elsewhere, LUV said late in the day that it plans to return to normal operations “with only minimal disruptions” on Friday after over a week of massive cancelations and delays.  Earlier in the day, LUV had said the outages of the last week will definitely have an adverse impact on Q4 results.  Finally, HSY was hit with a class action lawsuit claiming the company’s dark chocolate contain harmful levels of lead and cadmium.

In energy news, TRP said Thursday that it has completed a controlled restart of the Keystone pipeline after a 21-day outage.  While the cleanup from the third major spill from the pipeline will take months to complete, the flow is back to the 622k barrels per day as it was prior to the closure.

In miscellaneous news, the US Treasury Dept. said Thursday that starting on Jan. 1, electric vehicle leases can qualify for up to $7,500 in tax credits.  The decision also lifts the 200,000 vehicles per manufacturer cap and allows cars assembled outside of the US to qualify.  Essentially, this group of decisions will benefit all makers o electric vehicles.  In related news, Energy-company-funded US Senator Manchin has called for the Treasury Dept. to pause the implementation of those tax credits (despite it having previously been passed into law) saying the Treasury decisions are inconsistent with the intent of the law and would weaken our country’s energy security.

Overnight, Asian markets were mixed, but leaned to the upside on mostly modest moves.  South Korea (-1.93%) was an outlier to the downside while Shanghai (+0.51%), Thailand (+0.45%), and Taiwan (+0.37%) led the more numerous gainers.  In Europe, with the lone exception of Athens (+0.55%), we see red across the board at midday.  The FTSE (-0.48%), DAX (-0.83%), and CAC (-0.65%) are leading the region lower in early afternoon trade.  As of 7:30 am, US Futures are pointing toward a down start to the last day of the year.  The DIA implies a -0.31% open, the SPY is implying a -0.47% open, and the QQQ implies a -0.75% open at this hour.  At the same time, 10-year bond yields are up a bit to 3.839% and Oil (WTI) is off about a half of a percent to $78.07/barrel in early trading.

The major economic news events scheduled for Friday are limited to Chicago PMI (9:45 am).  There are no earnings reports scheduled for the day.

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In late-breaking news, there is word out of Beijing that they have found a promising covid treatment, claimed to be as effective as PFE’s Paxlovid. The new pill is so far called VV116 (developed by two Chinese drug makers) and trials are showing it may have fewer side effects than the PFE treatment. Beyond that, the key things to keep in mind today are that this is the last day of 2022 trading, and also we have a 3-day weekend ahead. So, get your account ready (small, hedged, or purposefully ready to ride out volatility) for the long news cycle.

With that background, it looks like all three major indices are looking to open up back below their T-line (8ema) but still inside the choppy bear trend consolidation pattern of the last two weeks. The DIA is also looking to open up back below its 50sma as that test continues. At this point, over-extension is not a problem in any of the major indices. However, remember that we are likely to continue seeing very light volume as fund managers get out of town to extend their New Year’s weekend celebration even further. Obviously, think long and hard before you go chasing too many new positions unless you are very nimble. This is not the time to be trying to save your month or year with some hero trade.

As always, be deliberate and disciplined…but don’t be stubborn. If you have a loss, admit you were wrong and take that loss before it gets out of hand. And when the price does move in your direction, always move your stops in your favor and take a little profit off the table. You have to keep the “Legend of the man in the green bathrobe” in mind. In a winning situation, it is NOT HOUSE MONEY you’re betting, it’s YOUR MONEY! There is absolutely no reason to keep raising your bet (risk) size just because you’ve had a win. Finally, remember that trading is not a hobby. It’s a job. The money is real and so is the risk. So, treat it that way. Do the work and follow the process. Stick to your trading rules, trade with the trend, and take those profits when you have them. Do the work!

See you in the trading room.


Swing Trade Ideas for your consideration and watchlist: No Trade Ideas Today. You can find Rick’s review of tickers on his YouTube Channel here. Trade your plan, take profits along the way, and smart. Also, remember to check for impending earnings reports. Finally, remember that any tickers we mention and talk about in the trading room are not recommendations to buy or sell.

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