Pre-Market Outlook - 5/5/2021 | Archimedes Methodologies

Wednesday Morning, May 5, 2021

This morning is nearly the reverse of yesterday. The S&P 500 will be opening above yesterday’s range with a true gap higher so gap rules will apply this morning, but in the opposite direction from yesterday. The market will open in the upper half of the overnight range, with inventory nearly 100% long. Last night, the market nearly filled yesterday’s gap down and tried to find acceptance back inside the old balance range above 4167 – and we will open within that range this morning.

When overnight inventory is 100% long, we expect a counter-auction at the open, where the overnight traders take some profits. With a true gap, that can be part of the initial fade.

I would analogize where we are to working on the top floor of a skyscraper. Everything looks fine in your office as you are walking around and talking to your colleagues, until you go to the window. If you click to enlarge the chart below, you will see what I mean.

Other than a minor correction low yesterday on the 80-day cycle, neither the S&P 500 nor NASDAQ 100 indices broke their trends. With the S&P 500 index holding above the 21-day EMA and the NASDAQ 100 still below it – my short-term bias remains neutral.

The catalyst for the cycle low yesterday was some remarks released from Treasury Secretary Janet Yellen, indicating that higher interest rates may have to be tolerated to cool the economy because the extra $4 to $6 trillion in deficit spending was needed by the Biden administration regardless of its impact on the economy and inflation. Kudos for a bit of honesty.

Then, apparently, Ms. Yellen was taken out to the woodshed behind closed doors. The market later turned around when she backtracked on her earlier statements and towed the party line. “The inflation is transitory, and there is no need to raise interest rates.” Well, Janet, that did not seem to lower my expenses, now did it?

Although we are in the middle of the gap and also back within balance, I will start the session by noting whether or not overnight inventory corrects at all and, if so, how much. Whether or not prices can trade back into yesterday’s range will be important in gauging strength today and identifying the best trade in the daily timeframe. I would avoid this gap area and trade later rather than earlier, giving the market some time to show its hand before engaging with it.

A gap-and-go scenario will play out one of two ways today. We can get an early fade that will fail where we would expect it to then reverse higher, or we could have an initial drive lower that puts the single prints into play right away. The short is either at the balance area low or on a cross back down through the open in the first setup. The second setup is always harder to pull off as there is less of a reference as to where to place a stop.

With value (where 70% of the volume traded) significantly lower yesterday, my focus today will be on the gap and where prices trade in relation to its top and bottom. Above the top of the gap is more bullish, while below the gap puts prices back into yesterday’s regular session range and confirms yesterday’s negative action. The divergence between the NASDAQ 100 and the S&P 500 on the daily charts is considerable and adds to the complexities of where we find ourselves in this market.

Be careful today. There are a lot of cross-currents.

A.F. Thornton

Pre-Market Outlook – 5/5/2021