This Is A Technical Warning Sign – Market Drop Coming Soon – Be Careful With Longs

Posted 9:15 AM ET - Yesterday the S&P 500 closed out its best August in 30 years. Stocks spent most of the day in positive territory, but late day selling pushed the index down to its low of the day. This rally is over-extended and I characterize it as a seller's boycott. Trading volume has been relatively light and I believe we could see profit-taking in the next two weeks. Major economic releases will be posted this week and ISM manufacturing will be released 30 minutes after the open. ADP, the Beige Book, ISM services and the Unemployment Report will provide us with some action. Initial jobless claims have averaged more than 1 million during the last few weeks and that will be reflected in the jobs numbers. Congress is in recess and we won't see a stimulus bill anytime soon. The second wave of the Coronavirus has impeded the economic recovery and small businesses will be forced to lay off workers without a government lifeline. Restaurants employ 8% of the workforce and consumers are not eating out according to statistics that were released for August. Sales were down approximately 51% year-over-year and there has not improved in the last three months. The eviction moratorium ended yesterday and millions of renters could be forced to move. The Coronavirus seems to have peaked and the rate of new cases is declining across the nation. Vaccines are being fast tracked and AstraZeneca is the third company to start Phase 3 clinical trials. Zoom (ZM) reported a 355% increase in revenues and the stock is up 38% after the news. Businesses will utilize virtual meetings even after the virus is contained. The stay-at-home model has improved life for employees because they don't have to spend time each day commuting. Companies don't have to lease expensive office space in metro areas and productivity has increased. We can also expect less business travel. This is a macro change and suburban real estate prices are on the rise as workers move out of big cities. Earnings season has ended and corporate profits were down more than 30% on average. At a P/E current of 23, stocks are rich by historical standards. From a technical perspective this is a buying climax. In today's chart I have drawn an upward sloping channel and you can see that the S&P 500 has poked through the upper end of the channel. These moves typically reverse very quickly and I believe we could see selling in the next two weeks. The drop will be swift and SPY $337 could be tested as bullish speculators are flushed out. For this reason, swing traders with a longer time horizon of (4+ weeks) should be sidelined. The dip could come at any time and we will be able to gauge the selling pressure and the appetite for stocks when it happens. Short-term swing traders should be very cautious with out of the money bullish put spreads. Stay very short-term and take advantage of accelerated time decay. If we start to see late day selling, take profits on some of your positions and reduce risk. This would be especially true if the underlying stock loses its relative strength. Day traders should wait for support to be established. Use the 1OP indicator as your guide. On deep troughs in the indicator, wait for technical support on the SPY using a five minute chart. Once we have this set up, buy stocks with relative strength and heavy volume that are breaking out. We have successfully been using this technique to make money day trading for months. ISM manufacturing will be released 30 minutes after the open and you should watch that reaction carefully. The economic news this week should generally be good. Investors are willing to look past the recent soft patch and they believe the conditions will improve quickly when the virus subsides. Use caution as you trade the last leg of this rally and know that a round of profit-taking could surface at any time. . .

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