How to trade the employment report

End of Day Update:

The S&P500 treaded water Thursday ahead of Friday’s monthly employment report. We opened higher, but that attempted rally fizzled and we stumbled into the red by lunchtime. But the selling was just as uninspired and we rebounded back to breakeven by the close. Prices move when traders change their minds and throughout Thursday, bulls stayed stubbornly bullish while bears remained stubbornly bearish.

Recent weakness has been driven by flare-ups of the recurring Chinese/Asian slowing and sluggish domestic earnings themes. These persistent stories caused us to bump our head on 2,100 resistance last month and now that we’re 50-points lower, we are left wondering if this is a buyable dip, or the start of something far more insidious.

The thing about recycled headlines is they rarely lead to sustainable moves. When a story has been with us for six-plus months, there is plenty of time and opportunity for it to get priced in. Those that fear these events have been given more than enough incentive to bail out of their positions during last fall’s and this winter’s pullbacks. The remaining owners either chose to stick with this market despite these concerns, or even more bold, bought the dip despite them. This turnover in ownership transitioned us from a market that feared Chinese weakness, low oil prices, and lackluster earnings growth, into a core group of owners that is indifferent to these items. No matter what the headlines proclaim, if owners refuse to sell, supply remains tight and it is easy to prop up prices. While bears want to argue with the market for countless reasons, it is a losing cause if owners are not listening.

Friday’s employment report will give us insight into the market’s mood and which direction it is inclined to go. The knee jerk reaction is more vulnerable to a downside move because both “too-good” and “too-bad” will cause impulsive traders to hit the sell button. Only a “just-right” will lead to an explosive move higher without looking back. The most interesting development will be if the knee-jerk lower drops us under widely followed technical and popular stop-loss levels near 2,040 and the 50dma. If we stumble lower but then quickly recover those losses, that means we are dealing with a resolute ownership base and their reluctance to sell is keeping supply tight. Undercutting popular stop-losses and flushing out the remaining emotional owners could set up an attractive capitulation bottom and dip-buying opportunity for the adventurous. If bears cannot close the deal on Friday, stick with the bulls. On the other hand, if we stumble and cannot get back up, we’re likely headed for a retest of 2,000 support. Trade the market accordingly.

Jani

What’s a good trade worth to you? How about avoiding a loss?
For less than the cost of a daily coffee, have analysis like this delivered to your inbox every day during market hours. As an added bonus, I share personal trades with subscribers in real-time.
Start your free trial today!