Early Bounce After Monday’s Mauling

Markets gapped down more than 1.5% today and then followed through until the SPY managed to find some support at the 500sma around 11:30 am.  Despite an hour-long mid-day attempt to bounce, the bears stepped back in to take all 3 major indices back to their lows by 2 pm and continue sliding toward the lows of the day.  The QQQ was clearly the ugliest of the major indices, with the SPY not far behind while the DIA benefitting from the safety trade printing a gap-down black Spinning Top that bounced up off the February low (probably on safety trades).  Every sector was in the red, with Energy leading the charge lower.  This left us at new 52-week lows in all 3 of the major indices.  On the day, SPY lost 3.16%, DIA lost 1.89%, and QQQ lost 3.86%.  The VXX rose 3.5% to 28.01 and the only possible silver lining for the Bulls is that the market is now very oversold with the T2122 falling to 1.33.  10-year bond yields fluctuated wildly during that day, reaching the high since 2009 (3.185%) but fell back to 3.04% by day end.  Oil (WTI) fell a whopping 6.4% to $102.75/barrel.

After the close, SPG, IFF, EQH, AMC, XPO, CLOV, HI, MRC, VRM, UNVR, and MCHP all reported beats on both revenue and earnings.  Meanwhile, ICUI, DNB, missed on revenue while beating on earnings.  On the other side, IAC, CAPL, SWX, VVV, and RNG reported beating the estimates on revenue but missed on the bottom line.  Finally, NVAX, ZNGA, and PRIM reported misses on both lines.

Realtor.com reports that the supply vs. demand balance of the real estate market has started to improve.  April home for sale inventory was down just 3%-12% from the same time in 2021 and this was the smallest year-over-year drop since 2019.  The data suggest that the rapid rise in interest rates, which has made housing bubble prices even more expensive for buyers is slowing the pace of sales, despite listings being down 67% from pre-pandemic levels.

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On the Russian invasion story, MSCI research said they are now expecting Russia to default on bond payments on May 27.  Since late February, the US Treasury Dept. has been approving (on a case-by-case basis) Russian payment on bond debt.  The exemption to sanctions that allowed that flexibility expires May 25 and the firm does not believe the US will renew the exemption.  Elsewhere, NBC reports that more than 1 million Ukrainians have been forcibly relocated to Russia. Meanwhile, the European Bank for Reconstruction and Development estimates the Russian economy will only shrink 10% in 2022 (mostly due to the huge increases in exported energy prices largely offsetting the loss of domestic activity), while the Ukrainian economy will shrink by 30%.  To me, a contraction of only 30% is nearly miraculous.  With an active war ongoing, many of the major centers of industry in ruins, all ports closed, one-third of the population now being refugees, and only half of the crops able to be planted, it is hard to see how the country’s output could be down only 30%. Finally, the US has suspended the 25% tariff on Ukrainian steel for a year. (That said, it is unclear how much steel can make it from Ukraine to the US given most steel production is in the South-Eastern parts of the country and would normally ship through the closed ports.

The Fed warned of tightening financial market liquidity overnight. Meanwhile, the market waits on more inflation data tomorrow as well as President Biden speaking on the subject at 11:30 am today…and inflation has been the key market driver for a while now. Oil markets have slumped the last two days as traders see the EU softening its sanctions on Russian oil in the face of Pro-Putin Hungary’s veto power on the ban. (The problem with the EU is that it requires unanimity to act.)

The economic news coming later this week includes Apr. CPI, Crude Oil Inventories, 10-year Bond Auction, and Apr. Fed. Budget Balance on Wednesday.  Then on Thursday, we get Apr. PPI, Weekly Initial Jobless Claims, the WASDE Report, and a Fed speaker.  Finally, Friday we see Apr. Imports/Exports, Michigan Consumer Sentiment, and a couple of Fed speakers.

Overnight, Asian markets were mixed.  Shenzhen (+1.37%), Thailand (+1.14%), and Shanghai (+1.06%) led the gainers.  Meanwhile, Hong Kong (-1.84%), New Zealand (-1.34%), and Singapore (-1.25%) paced the losses.  (Hong Kong’s bad day may in part be the result of a new “pro-reintegration-to-China” leader who has taken over.  In Europe, stocks are rebounding from Monday’s terrible day as of mid-day.  The FTSE (+0.67%) lags as the “Queen’s Speech” was delivered in absentia and focuses on the high cost of living.  However, the DAX (+1.44%) and CAC (+0.96%) are typical of the region in early afternoon trading. As of 7:30 am, US Futures are pointing toward a gap higher to start the day as stocks try to recover some of Monday’s losses.  The DIA implies a +0.77% open, the SPY is implying a +0.87% open, and the QQQ implies a +1.32% open at this hour.  10-year bond yields have dropped sharply but remain above 3% at 3.024% and Oil (WTI) is off another 1.7% to $101.41/barrel in early trading.

Once again, there is no major economic news scheduled for release on Tuesday.  However, there are 5 Fed speakers scheduled (Williams at 7:40 am, Bostic at 8:30 am, Waller and Kashkari, both at 1 pm, Mester at 3 pm, and Bostic again at 7 pm).  Major earnings reports scheduled for the day include FOX, AHCO, ARMK, AVYA, BHC, BCO, BLDR, CCO, XRAY, DBD, DSEY, EPC, FOXA, H, IAA, IIVI, IGT, LCII, LI, LDI, MIDD, EYE, NXST, NCLH, PTON, PLTK, REYN, SONY, SYY, TDG, UWMC, and WMG before the open.  Then after the close, ADV, ALC, ELY, COIN, DAR, EA, GSM, FNF, GFS, GO, HRB, JXN, LBTYA, LNW, OXY, OSCR, RXT, RBLX, RKT, SCSC, WELL, WYNN, and YELL report.

So far this morning BAYRY, DKILY, ITOCY, BLDR, MIDD, IIVI, IAA, IGT, LCII, ARMK, and NXST have all reported beats on both revenue and earnings.  Meanwhile, SONY, NTDOY, SSUMY, TYOYY, EYE, AZUL, and SU all missed on revenue while beating on earnings.  On the other side, HGV has reported beating the estimates on revenue but missed on the bottom line.  Finally, NPSCY, XRAY, NCLH, PTON, RICOY, AVYA, DBD, BHC, and KWHIY have reported misses on both lines.

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Futures are backing off earlier highs. However, it appears we will still see a bounce at the open. The question is whether that is a “dead cat” bounce or the beginnings of a reversal. The smart money remains in the “relief rally only” camp given the strong bear trend and current over-extention. So, if you are bound to go long in this move, be very cautious and extremely nimble. The bears still have all the momentum and this would be an excellent place for a Bull trap. As always, don’t get caught chasing moves, and be quick to take profits when you have them.

Stick with your trading rules and manage the things that you can control while trying not to worry about the things you have no control over at all. Trade with the trend, don’t chase, keep consistently taking profits when you have them, and move your stops in your favor. Remember that the first rule of making big money in the market is to not lose big money in the market. So, don’t be stubborn, and protect yourself from yourself. You also don’t need to be in the market all the time. If this isn’t a market condition you thrive in, then get out of the way. It will settle out at some point and it’s far better to wait and have money the market condition you prefer than to force trades now and be busted when things do turn. Keep in mind that nobody is right all the time. If you’re wrong, just admit it and take your loss. Focus on your process and enjoy yourself.

Ed

Swing Trade Ideas for your consideration and watchlist: SHW, TSLA, NVDA, MSFT, AMZN, NFLX, JPM, FB, AAPL, BBIG, ADM, PEP, C, WFC, GILD, SPXS, UVXY, SQQQ . 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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