Market Drop Coming – I Am Buying Puts Today and VXX Calls

Posted 9:30 AM ET - The market is searching for direction during this news vacuum. Investors are nervous when DC is in recess and we have dark clouds approaching after Labor Day. The FOMC minutes were the only speed bump and they are weighing on stocks this morning. Fed officials plan to tighten (reduce their balance sheet) in September and a rate hike is likely in December. Congress is in disarray and so is the White House. Politicians will have to find common ground very quickly as the debt ceiling approaches (5 to 6 weeks). I've been mentioning in my comments that trouble lies ahead. I have a small call position (50% of normal size) and I will exit on the open today. I should be able to scratch the trade and I might make a little money. If the market closes below support (SPY $246 and QQQ $143), I will start scaling into put positions. Given that the market is in a long-term uptrend I will be much less aggressive on the short side. The better trade will come in October when the market rebounds. I also suggest buying back bullish put spreads if the market closes below those levels. Swing traders have benefited from a week of time decay and you should be able to buy these spreads back at a small profit. Day traders need to tread cautiously this morning. This wave of selling came one week after the last round of selling and profit-taking could set in. If the market takes out key support levels and if it makes a new low after the first hour of trading I will focus on the short side. If these support levels hold I will passively play the bounce. If the market bounces off of support swing traders need to wait patiently on the sidelines. The storm clouds are building and a nice shorting opportunity is close at hand. You just need technical confirmation so wait for the breakdown. Watch those key support levels and get short if we close below them. . .

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