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Posted by Pete Stolcers on May 31

Posted 9:30 AM ET – Trading volumes have been cut in half and momentum favors the upside. Energy and financials are not participating and I’m skeptical of this rally. Aggressive traders can trade from the long side and use SPY $240.60 as a stop on a closing basis. As the June FOMC approaches I urge you to be careful. The downside risks are greater than the upside rewards.

China’s PMI came in as expected (51.2). This was a neutral number. Germany’s retail sales were light. Global economic growth is moderating.

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ADP will be posted tomorrow and it will set the tone for Friday’s Unemployment Report. Analysts are expecting 185,000 new jobs. This is a low hurdle and the recent decline in initial jobless claims leads me to believe that it will come in above it. Unfortunately, we need consistent job growth in the 250,000 range to justify the third rate hike in six months.

The recent market rally has provided the Fed with a window of opportunity and they will take it in two weeks.

Swing traders can buy puts if the SPY closes below $240.60. Only take half a position. I don’t like shorting the market at an all-time high and the bounces can be fast and furious as we saw two weeks ago. Passive traders should stay in cash and wait for a pullback. Your bullish put spreads should be performing well and you can reel them in for pennies.

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Day traders need to be very cautious. Trading volumes are extremely light and price movement is random. If the market can breakout of the first hour range, favor that side. Look for a few good trades and set passive targets. I have trimmed my size and trade count.

Trading activity should be a little better over the next three days. The Beige Book (today), ISM manufacturing, ADP and the Unemployment Report will give traders something to look at.

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Passively trade from the long side and know that profit-taking could set in at any time. Late day selling and follow through the next morning would be a bearish sign. Use SPY $240.60 as your guide.
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