Market Has Been Testing This Support Level All Week – Here’s How To Trade the Dip

Posted9:30 AM ET - The S&P 500 has been struggling to advance this week and the bid has been tested each day. Yesterday we saw late day selling and that is spilling over this morning. Earnings season has officially kicked off and major banks are the first to announce. The market is in an upward sloping channel and we are likely to find support above the lower end at SPY $370. A $1.9 trillion stimulus plan and tech earnings will keep buyers engaged for a few more weeks. The first support level is SPY $377. It has been tested a number of times this week and the market will open right at that level this morning. If we are trading below it after two hours we will see additional selling pressure today. I believe that the market will find support and that it will gradually float higher in the next two weeks. We could even see a market melt up. All of the major banks are trading lower after announcing earnings. In my comments this week I have mentioned that that was likely. These stocks have moved higher and they will struggle to make money in a low interest rate environment when job losses are on the rise. Initial jobless claims came in at 965,000 yesterday and that's the highest number we've seen in months. Last week the Unemployment Report and ADP both showed job losses. This morning, retail sales declined .7% and that was worse than expected. The Coronavirus continues to spread and analysts believe that vaccinations will not have a material impact until May. This means that an economic rebound is not likely in Q1. The Coronavirus is also spreading in China and 28 million people are in home quarantine. They have vaccinated 10 million people. Joe Biden released his stimulus plan yesterday. Unemployment benefits will receive an additional $400 per week and individuals will receive a $1400 stimulus check. There is also aid to states and money for vaccinations. The helicopter drops continue. Swing traders should mainly be in cash waiting for a better entry point. We have been selling out of the money bullish put spreads that expire in three weeks or less on stocks that are about to announce earnings. These stocks have a tendency to rally into the announcement and we know that from past price movement. We are leaning on that statistical edge and we want to take advantage of accelerated time premium decay. The short strike price is below technical support and that also works in our favor. The market backdrop is vulnerable to profit-taking and I believe that the bid will remain strong for a couple more weeks. Day traders should search for relative strength on this opening dip. Make sure that support is established before taking long positions. I would prefer that we spend some time at SPY $377 before we rally. That would confirm the buyers are still there. An instant rebound could be short-lived and the market could fall through that support level if sellers have a running start at it. I like down opens because we can easily spot relative strength. I believe that much of yesterday's decline was program driven and we are seeing follow-through selling this morning. Financials are also soft after reporting earnings. I still prefer to trade from the long side. If we make a new low after two hours of trading, favor the short side. Support is at SPY $377 and $370. Resistance is at the all-time high. . .

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