The Strong Open and Weak Close Pattern Is a Warning
Lower oil is boosting the market as investors await the SpaceX IPO.
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The market is shrugging off Wednesday’s gloomy session and the news of more capital spending in the AI sector from Oracle (ORCL). Futures are pointing higher Thursday morning, with the Invesco QQQ Trust (QQQ) up more than 1% premarket and the broader indexes following.
The good news is that oil is down. Iran is claiming it closed the Strait of Hormuz, and the U.S. is ramping up defensive attacks, but oil is still lower Thursday morning. That tells us the market does not fully believe the Iran threats and is positioning for the possibility that the inflationary pressure may not be as severe as feared.
The recent mood has been negative after several poor sessions, and we are getting some relief as investors prepare for the excitement of the SpaceX IPO on Friday.
PPI and the Oil Story
We have the Producer Price Index for May at 8:30 a.m. ET which could generate a reaction. The most important driver of optimism Thursday morning is the action in oil, which is offsetting some of the inflation data. Lower oil is the most direct signal that the worst-case scenario on Iran may not be playing out.
If oil holds the lower levels through PPI, the inflation fears become easier to absorb. If oil bounces back on a hot PPI reading, the bounce action Thursday morning will likely fade quickly.
Strength Is Being Sold
The biggest problem in recent action is that strength is being sold. Investors are looking for an off ramp and they are taking it whenever there is some strength. We’ll see if they do a better job Thursday morning but the key is the close. When markets are correcting we tend to have strong opens and weak closes.
In the last seven sessions the SPY has closed near the lows three times. We are still holding the 50-day moving average but that is the key support level.
A failure of the 50-day on a weak close would be the kind of technical break that confirms the character shift I have been discussing. A strong close above the morning highs would be the first session in a while that breaks the pattern of selling into strength but the SpaceX IPO is going to be a major tell on Friday.
Strategy
My strategy is to not trust strength to be sustained at this point. I am a seller into strength and selective with buying. My cash levels are high and my buys will be small and incremental. I want to keep accounts close to highs so strong defense is the name of the game.
The bounce Thursday morning is welcome but it does not change the underlying picture. Oracle’s capex and the Super Micro Computer (SMCI) dilution from Wednesday confirmed that the AI infrastructure trade has a balance sheet problem that has to be worked through. The SpaceX IPO Friday adds another supply event. The path of least resistance is still down until the closes confirm otherwise.
At the time of publication, Rev Shark had no positions in any securities mentioned.
