DailyPlay Update – August 5, 2022

It’s another summer Friday. Boy, do they come quickly. But to most of us, we’re glad to see the rally last that started last Wednesday when the Fed again raised rates. Despite several Fed governors telling us earlier this week that they were not done tightening – the very opposite of the supposed reason behind the equity market’s rally – they’ve continued to edge higher.

So, when you think it through, there clearly was some other reason that stocks have not sold off after the clarification of the Fed still needs to push yields higher. If it’s as simple as I suggested yesterday – that the bearish positioning was so strong that two weeks ago’s rally is pushing to a five-week high and also seeing price extend up above the weekly Conversion Line – then this rally is more than halfway done. (Bear market rallies can be vicious.) However, if it’s the real McCoy (i.e. If this is real buying largely fueled by new money coming into the market (rather than shorts bidding up stocks to cover bad positions) then any pullback to support needs to be bought.

I’m definitely in the camp of the former and think that when we see most convinced that new 2022 highs will come later this year – then, and only then, will I really play for a down move that potentially comes lethally and swiftly – for there will be few to no shorts left to cushion the decline, and few buyers to bid for stocks they already bought higher.

In the meantime, the SPX has reached an obvious resistance level in the 4150 +/- 1% area where we saw it previously break down from. Let’s see what today brings with oil still tailing off and whether there will be continued enthusiasm that inflation has peaked. 

And lastly, start planning on what you will do if the market continues higher.  Buy more? Thankfully sell? Or just hold (and deal with the future ups and downs at a later time)?  

Though oil has finally gone our way with just a week to go before the expiration of our short Aug. 12th USO $73/$83 call spread, let’s take off one of the three contracts we have on to lock some profit. The daily chart posted a Sequential -13 on Wednesday, so better safe than sorry.

USO – Daily

Enjoy your weekend.

– Rick Bensignor
Chief Market Strategist