I Still Expect Market Support To Hold – The Longer Term Backdrop Is Weakening

Posted 9:30 AM ET - The market drop yesterday is out of character based on the type of price movement we have seen the last few years and that is a “red flag”. Typically after a major moving average has been successfully defended the market would race to a new all-time high. The weakness in November and December told me not to expect that. However, I did feel that the 100-day MA would hold the next few weeks as earnings season unfolded. The S&P 500 closed on its low and below the 50-day MA yesterday. We are seeing follow through selling this morning and the 100-day MA is in play. I could make equally compelling arguments on why the market could go higher or lower so I am only going to focus on what the technical are telling us. On a longer term basis the SPY has to defend an upward sloping trend line that started in October. It also has to find support at the 100-day MA. If you look at the 100-day MA tests in the last few years, they have been very brief and they have not been challenged for months. In the last 45 days, we have tested the 100-day MA three times and we could test it today. That is bearish. Swing traders do not have to hit the panic button. You should have OTM bullish put spreads on and the stocks you selected needed to be strong. Your bullish put spreads should be below technical support. Watch those stocks and look for relative strength. Does that mean your stocks will not go down? No. It means that relative to the market, they are holding up well. You want that to continue. If that is the case, maintain the positions and use those longer term support levels for your stops. If you have a basket of these positions on you can add some overnight protection using SPY puts or /ES if the SPY closes below the 100day MA (unlikely). I would not go overboard with this hedge since I still expect the 100-day MA to hold into earnings season. Remember the stock just has to hold that support for the trade to work out. Day traders this will be a nasty down open. I won’t chase a gap and go drop with stacked red candles, but that pattern would suggest a bearish trend day (20%). Any bounce would be an opportunity to short and we could test the 100-day MA if this happens. Stacked green candles on the open that retrace to $463 would tell me that buyers are still engaged. We may see choppy trading, but a blood bath will be avoided (20%). One of the most likely scenarios is a choppy but steady drift lower with long red candles and small green candles on the retracements. This pattern is resolved with a series of long red candles through the low end of the trading channel (M5) and a bullish engulf or bullish hammer (30%). That low would take 3 hours to form and it would be a good opportunity for long only traders (be patient). The other pattern is mixed horizontal candles (30%). This would confirm support. The longer the low of the day holds, the more likely we are to bounce and I would favor the long side if I see this. There is incredible sector rotation. Make sure you are leaning on this regardless of which side you pick. I am trading normal size. There will be good movement today. Support is 100-day MA. Resistance is at 50-day MA . .

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