Overnight inventory is balanced, and the open is all about the Employment Report. The market is cogitating on the report at this writing. If we are dealing with a gap higher this morning, Gap Rules apply, paying particular attention to numbers 2 and 4. Spike Rules apply as well. The latter is to be distinguished from “Spike and Channel Rules.”
In this case, we are referring to a late-day spike near the close. Opening above or within the Spike is bullish. Below it is bearish. The Spike starts at 4415.25. Short-hand for the Spike is the Overnight Low at 4416, which would also be a good line in the sand today. The market’s reaction to the Employment Report at the open really dictates all of this.
Balance Rules continue to be applicable now that we are flirting with trading above the balance area high at 4422.50. We have to continue to be on guard for a look above and fail. If we are on track to close today below 4422.50 after breaking above that level materially, that would be a bearish sign, and I would exit all long positions.
Rolling / Selling August Options
If you are holding August calls, premium decay is starting to accelerate. Today is a good day to either sell them or roll them to September. You could sell them and try to repurchase the September calls cheaper, but the breakout may take us to the first target at 4481 fairly quickly, so it is risky to try to time an exit and entry. Rolling the options may be your best bet.
If the breakout fails, the target is at the bottom of the recent range at 4365.25. If the breakout holds, the first target is double the balance range at 4481 or so. The next target would be the projection of double the July 19th to July 26 range at 4570. Right before that is the 1st leg of the recovery from the March 2020 lows to September at 4537. For all of these reasons, we need to be heavily focused and on guard for a market top around 4450.
Employment Report
The July Employment Report was strong, alleviating fears earlier this week when the ADP numbers flashed some preliminary weakness. The Delta Virus variant effects are not reflected in the numbers. However, the evidence does not suggest that the Delta variant, while more contagious, is more harmful. Thus far, it appears to be more of an excuse for fear-mongering, political gains, and more authoritarian rule. Those using the new variant for political purposes ignore the treatment modalities to alleviate symptoms and speed recovery. Also, remember that 99.7 of those who get the virus recover.
Rotation
Interest Rates jumped this morning on the strength of the report. I suspect that the NASDAQ 100, the main beneficiary of recent falling rates, will suffer the most due to the report. The Dow likely will benefit the most. Our swing positions in Financials and Energy should also be beneficiaries. Rotation could pull the S&P 500 in both directions as money rotates from growth stocks back to cyclicals. We will see what the day brings.
Today’s Day Trading Plan
Today, your main focus should be on yesterday’s high at 4422.75, which was a double top from the previous session and a fraction above the recent, all-time high. As I write this, we are currently trading right at that level. If the market cannot sustain the breakout, balance rules tell us there is potential for rotation to the opposing end of the balance area at 4365.25, though it does not all have to occur in one day.
If I were an institutional money manager and wanted out of this market or to reduce my exposure, I would sell into this strength. Also, however, I would be selling my NASDAQ 100 positions and buying the beat-up cyclicals such as Financials and Energy. I am expecting the latter rather than the former.
Assume strength above 4422.75 and weakness below. Internals will tell us a lot, as will the Globex low at 4416, also the low of a 45-degree line, which should be secure. A breach would be a sign of weakness and put the prominent POC into play at 4411.75. But if we approach the close below the top of the balance range and yesterday’s high at 4422.75, I would be hard-pressed to stay bullish in the short-term and instead expect an intermediate correction to begin, or at least a continuation of the consolidation/balance range.
Good luck today.
A.F. Thornton