S&P stock futures are more than 1% higher on Tuesday following a sell-off of the same magnitude to start the week yesterday. The focus remains on Europe, where business sentiment unexpectedly rose sharply in the German economy and a better than expected Spanish debt auction boosted optimism. The Euro rose o.6% to $1.2080, back above the key $1.30 level. Germany remains a beacon of light in the European economy, showing tremendous resilience in the midst of a faltering Euro bloc.
Over the last 6 weeks,the market has had many gap-ups that have not held during the following session. That type of action is not conducive to active trading, but a certain point traders must recognize the norm and make adjustments. With an extremely thin tape this week, however, the market may bounce around in a wide range and moves may not carry much validity.
Shares of emerging technology company Red Hat (RHT) are down 7% in the pre-market after missing on its 3rd quarter earnings estimates last night. Navistar (NAV), in sharp contrast, is up more than 11% this morning after profits from its North American truck business dramatically surpassed expectations.
Sprint Nextel (S) is the biggest winner after AT&T (T) pulled out of its proposed $39 billion takeover of T-Mobile from Deutsche Telekom. Immediately after the deal was proposed it met stiff resistance from regulators and seemed destined to fail. Sprint is up 6.5% this morning on the news, while AT&T is down 1%.
The question for traders is, will this gap up be different?
For starters, this chart pattern looks a bit familiar. The Friday after Thanksgiving (November 25th) where we closed right on the 61.8% Fibonacci retracement. That Monday we had a gap and go that lead to a 100 handle move higher in a week!
Yesterday we closed around 1202, the exact 61.8% Fibonacci retracement level, which coincides with the small macro uptrend line as well.
The second reason I believe this can be different is market sentiment. Ever since the market broke down violently in late July-early August, we have seen periodic bounces that I believe have resulted from climactic levels of bearishness. Market sentiment is once again reaching levels that could lead to massive short-covering on a gap and go scenario. Today’s market is designed to inflict maximum pain on the average market participant, and today could be the beginning of another one of those short squeezes. I won’t be stubborn to the long side, however.
Overall, I see massive damage among leading high beta tech stocks, so any longs woulds strictly be trades at this point. Google (GOOG) has the best pattern while Apple (AAPL) has started to look more macro bearish. It may take very strong results from the Holiday shopping season for AAPL to get back on track.
The Oil Service ETF (OIH) looks battered and bruised, but could stage a mini bounce.
Gold (GLD) is broken but it’s been crushed enough it might try and test the 200-day around $1,610 ($157-$158 GLD).
Banks are a major weight on the rally, with Bank of America’s (BAC) break below $5 yesterday a major headline. They look to be bouncing this morning, and if they can get a lift it would be huge for a potential rally.
Retail lost a lot of momentum and but now holding so lower levels for a potential long trade.
I will see how the Banks and tech acts in the first 15-30 minutes to see if I can buy this open and then try and trail it long for a few days.
Every trader in America will try and short this gap open and sell the banks, which has been the right trade most of the time over the last few weeks, but things do not always act the same. If they can’t pull in perhaps that will be the clues that some stocks can be bought for a trade. This is only a micro strategy for those that have to be at work through year-end.
I will trade technical levels and not do the cost average game. If the gap fills to the downside in the first 60 minutes, things can get ugly quick.
Overall, if Santa does come the target would be 1230-1240, rather than the 1290-1320 we were talking about two weeks ago.
Disclosures: Scott Redler has no positions