Market Drop Very Possible – Wait For This Price To Be Breached

January 6, 2021
Author: Peter Stolcers, Founder of OneOption

Posted 9:30 AM ET - The market is trapped in a trading channel that has a gradual upward slope. Senate runoff results in Georgia seem to favor Democrats and the market is taking the news extremely well. Most analysts believe that if Democrats control of all three branches the Trump tax cuts would be repealed. The S&P futures are down approximately ei10 points before the open. I'm surprised that the market is holding up this well. The $2000 stimulus checks have been promised by Biden and that instant injection of cash is the focus. Longer-term, I believe this will weigh on the market. Tax increases for individuals and corporations will hurt an already fragile economy. This morning we learned that private sector payrolls decreased by 123,000 and an increase of 88,000 was expected. ADP processes payrolls for small and medium-size businesses and they have their finger on the pulse of the economy. The four-week average for initial jobless claims has been around 850,000 and there's a good chance that Friday's Unemployment Report will not hit expectations (100,000). ISM manufacturing came at a very robust 60.7 yesterday (56.7 expected). ISM services will be posted tomorrow. New Coronavirus cases have not tapered off and states are shutting down. This will delay the economic recovery and most analysts believe that vaccinations will not have a material impact on the virus for a few months. With stocks trading at a P/E of 40, there aren't any bargains - the market is priced for perfection. Swing traders should patiently wait for a pullback before selling out of the money bullish put spreads. Stock selection is more important than ever. Clean energy stocks and marijuana stocks are in favor. The best strategy for swing traders right now is to remain in cash and to wait for a better entry point. The market is trapped in a range and we have seen heavy selling pressure at the all-time high. This is a sign of resistance. Day traders should watch the opening very closely. I believe that the selling pressure could increase if the results lean towards a Democratic victory for both seats in Georgia. A split decision is priced in and the market wants the Trump tax cuts to remain and it wants the $2000 stimulus checks. Now it looks like it might not get both and that outcome is not "perfect". I believe that surprise favors the downside. Bullish sentiment has been extremely high and option implied volatilities are near historic lows. This is a sign of complacency and this is when market declines take place. If I see a technical breakdown my market bias will turn decidedly bearish. We are in an 11-year market rally and a nine-month market rally. Picking tops is foolish and we don't want to short prematurely. Wait for technical confirmation. I'm keeping my risk exposure to a minimum and I view this as a low probability trading environment for swing trading. Day traders can adjust in a heartbeat and we might have a nice shorting opportunity. Support is at SPY $366. That is the uptrend line that started in November. Resistance is at SPY $375. . . image

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