The Market's Character: From Game of Macro to Game of Traps

Last year the stock market was very macroeconomics driven, as inflation and increasing interest rates were at the forefront of the market’s mind. With inflation dropping and the Fed coming close to pausing interest rate increases this year, I would argue that the market is shifting its eye away from macroeconomics and is becoming a more technical market. In other words, the market is changing from a Game of Macro to a Game of Traps. Just through observation, the market seems to be staying in a range and trapping both bulls and bears. The 30-minute chart below shows how the SPY seems to be rotating from Support Fibonacci Pivot Points (S1, S2, S3) to Resistance Pivot Points (R1, R2, R3), creating both bull traps and bear traps. Last week’s drop broke below the S3 Support Pivot Point and created a bear trap before racing back to the R2 Resistance Pivot Point.

There will be an FOMC meeting next week on Wednesday and this could create volatility to trap the bulls this time and begin to move the SPY back down to Support Pivot Points.

The 10-year Treasury Rate (TNX) is at the S3 Support Pivot Point and could begin moving up with Wednesday’s FOMC meeting, where there is an 85% chance of a 25 basis point hike. An increase in rates could take the wind out of technology and growth stocks.

On the positive side, market internals have improved and the SPY broke above the Volume Profile Point of Control. Breadth and volume increased last week as the VIX dropped to its lowest level for the year. The POC has served as a magnet for price since May 2022. Let’s see if the market has the fuel to continue upward.

For next week the options market is pricing in a $7.23 move for the SPY, providing a range between $23.16 and $408.70. For Friday, May 5th the options Max Pain chart shows a Max Pain level of $409, Call Walls at $425 and $415, and Put Walls at $405 and $400. If the market continues higher, it could reach the $423 to $425 level. If it goes lower it could hit the $409 to $405 or even $400 levels.

Let’s see what the cycles are saying. The chart below shows that the Cycle Composite (blue line) forecasts an up-cycle until 5/11, a down-cycle to 5/24, an up-cycle to 6/5, and finally a sharper drop to 6/26. The Seasonal Cycle has a slightly different forecast as it begins a down-cycle on 5/1 to 5/24, followed by an up-cycle from 5/24 to 6/5, followed by a deeper drop between 6/5 and 6/26.

The sector performance for last was pretty risk-on as the Communication Services and Technology sectors led.

I plan to trade the chart in front of me next week and be prepared for both a reversal lower and a continuation higher. We don’t control the market. As investors and traders, all we could do is put in the preparation work and trade the trend given to us.

Disclaimer: This is for educational purposes only and is not official financial advice. For financial advice, please consult a Financial Advisor. I actively trade all tickers mentioned, so assume that I do have a position.