Big Market Drop During the Day Wednesday – Here’s What We Learned

Posted 9:30 AM ET - Yesterday the S&P 500 opened at a new all-time high and we saw heavy selling pressure early in the day. The technicals and fundamentals are still intact, but we can expect profit-taking when prices get a little overheated. The S&P 500 has come a long way in two weeks and we can expect pauses and small pullbacks along the way. I still believe we will see SPY $400 this month. The economic data has been solid, earnings have been excellent given the backdrop, the Fed remains extremely dovish and a $1.9 trillion stimulus bill seems likely. This is the perfect set up for a melt up. Yesterday institutional traders tested the bid. Opening gaps higher to a new relative high are always vulnerable to profit-taking. I have pointed this out for years and that is why I am reluctant to buy on these moves. The selling pressure was immediate and once the momentum was established the bottom fell out. In a matter of 30 minutes, the S&P 500 fell 60 points. Sell stops were triggered and "weak hands" were flushed out. These drops are very telling and institutions watch the price action very carefully. If the bounce off of the low is fast and furious it is a sign that buyers are still engaged. That is exactly what happened yesterday. Once the low was established it was never challenged again. On the next dip buyers stepped in and we made a higher low. All of this price action during the day will be meaningless to investors because we closed just below the prior close. To me it is a sign that buyers are still in control. Buyers will be emboldened today and we should see a nice rally. I'm expecting a choppy grind higher for the next week and the bid should continue to grow as we get closer to a stimulus bill. Swing traders should be fully allocated. I suggest a combination of long call positions and bullish put spreads. When I buy calls I like to buy them in the money so that the Delta is greater than .65 and I like to buy options that have at least five weeks of life. These options move well with the underlying stock and time decay is not an issue for a couple of weeks. When I sell out of the money bullish put spreads, I like to sell below technical support and I like to sell options that expire in three weeks or less. Time decay is constantly working in my favor and I can distance myself from the action. Option Stalker searches like PopBull and Bull Flag find these stocks. If the SPY gets to $400, take some gains. Our market stop is a close below SPY $384. Day traders should tread cautiously on the open this morning. Make sure that the bid is strong. I would expect to see a little early selling just to make sure the buyers are still engaged. Once support is established the market should move higher. We might not drop on the open, we might just compress and that is also fine. Make sure that the early gains hold. Heavy Buying, Bull Run and Relative Strength 30 are your go to searches. We have seen two-sided trading the last week and you should expect intraday volatility. Support is at the low from yesterday and resistance is the high from yesterday. . .

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