No Market Rally Until Support At SPY $204 Is Tested – If It Fails – Buy Puts

Posted 9:30 AM ET - Last week the market bounced off of support at SPY $204. The move was brief and shallow. I believe that the support level will be challenged again this week and it is likely to fail. China's retail sales and industrial production were little light. The PBOC will save the day if needed so the damage was contained. We will see a similar situation this Wednesday when the FOMC minutes are released. The comments will be more hawkish, but the dismal jobs report will soothe rate hike worries. This rally was created by central banks so we need to monitor monetary policy very closely. Retailers have been posting terrible results and this sector is weighing on the market. Tech has also been declining. Apple made a new low for the year last week and the QQQ is below the 100-day and 200-day moving averages. The market will not rally without tech. I am long VXX. This is a bearish position and I might exit today or in the next couple of days. VXX needs a market decline in order to rally, but it also needs sustained pressure. I don't believe the news will be that dire and a gradual market decline won't generate the spike in VXX I am looking for. Next week the market will be in preholiday mode and option implied volatilities will decline. Consequently, I feel I can get better bearish value by buying July puts on weak stocks. I am long BZQ and this is a swing trade. I believe Brazil's credit will be an issue and I believe that the Olympics will shed light on the country's dire situation. Basic materials should also start to roll over and they are crucial to Brazil's economic activity. Last week I purchased puts on a variety of stocks that are breaking below horizontal support. I will add to these positions if the SPY closes below $204. The market won't stage a meaningful rally until support at SPY $204 is tested. I will favor the short side until then. There's a good chance that support at $204 will fail. That is our best chance for a decent price movement in the next two weeks. If support at $204 holds, the volume will drop off, the market will drift back into the range and trading conditions will be very tough. Have some bearish overnight exposure and watch SPY $204. . .

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