Market Likely To Test This Major Support – Here’s the Trading Game Plan

Posted 9:30 AM ET - PRE-OPEN MARKET COMMENTS MONDAY – Last week I explained that the FOMC rally was driven by quadruple witching programs that kicked in after the statement and those gains were given back Thursday. There was follow through selling on Friday and this morning the S&P 500 is down 60 points before the open. I believe the SPY will test the 100-day MA this week. Key changes in the FOMC statement from previous months: 1. The Fed will be reducing asset purchases (tapering) at twice the rate that was reported at the last meeting. 2. Virus variants could weigh on economic growth and Real GDP growth was lowered .4% to 5.5% for 2021. 3. Median forecast by Fed officials is 3 rate hikes in 2022 and that is up from zero during the September FOMC. Tightening will happen much sooner than previously expected. 4. Median forecast for 2023 is 4 rate hikes and that is higher 5. Core PCE inflation projections are up by .7% to 4.4% in 2021 (their target is 2% and projections have been 2.5% earlier in the year). Many countries are imposing travel restrictions and the virus is spreading rapidly. Domestic restrictions are likely to be imposed as well. The $2T stimulus bill looks like it is dead in the water and that possible stimulus will not supporting the market. Swing traders your long exposure should be limited to a handful of bullish put spreads. We did not get more aggressive because I have not liked the market back drop for a while. Manage those positions. We want the SPY to hold the 100-day MA and your stocks should hold the technical support levels that are above your short strike price. If the SPY and stock support levels fail, you need to buy back your spreads. Day traders, the best scenario would be a bounce right out of the gate. As that bounce stalls, look for opportunities to short. Unfortunately, this scenario only has a 20% chance of unfolding. A more likely scenario is a continued drop. Overseas markets were weak and the S&P 500 has been much lower overnight. I believe the most likely scenario (30%) is a continued move lower from the open and then we sit in a tight range after two hours of trading. Shorting has been very difficult in the last year and we are in holiday trading mode. If the bottom drops out right from the open I will be fairly passive. I want to see the action unfold because it gives me time to evaluate the price action and stocks. If we get a compression on the open I will use that time to find shorts. I will be favoring the short side. Look back at the chart from Friday. Remember the weak open and how it looked like the bottom was going to drop? If you shorted on the new low of the day, you had your ass handed to you on that 50 point rally. That is why you should not chase this drop right on the open. Be patient and you will have a trading opportunity. It might take an hour, it might take three. Do you want to ruin your holiday spirit? If so, trade like mad this week and then you can be Scrooge. Do you want to enjoy your holiday? Hang on to your trading capital and try to find one or two good trades. Focus on how you are going to improve your patience and take your trading to the next level in 2022. Support is at the 100-day MA and resistance is at $458 . .

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