Market Will Test Important Support Today – Here’s How I Will Trade

Posted 9:30 AM ET - The S&P 500 hit a soft patch this week after making a new all-time high. The last leg of this rally has been a stair-step process and the pullback was expected. By most technical standards this rally is over-extended. At a P/E of 40, the fundamentals are also stretched. I'm not looking for a massive meltdown, just a normal retracement within a bull rally. The S&P 500 is down 25 points before the open today and it will test the upward sloping trend line. The 20-day moving average also comes into play right at the base of that trend line and support has to hold today or we will see more selling next week. Seasonal strength, a lack of attractive investment alternatives due to low interest rates and the approval of Coronavirus vaccines are keeping buyers engaged. The market has been riding the upper boundary of the 20-day Bollinger Band and that typically sparks profit-taking. Bullish sentiment was off the charts and option implied volatilities were near their low of the year. These are also warning signs. Economic data points have been strong, but they are starting to deteriorate. The jobs numbers last week and the initial claims number yesterday were soft. The state shutdowns are having an impact and politicians are still haggling over the $900 billion stimulus plan. Brexit negotiations have stalled and the "drop dead" deadline for negotiations is Sunday. As I mentioned in yesterday's comments, a hard exit could be disruptive and this could weigh on the market. Swing traders should patiently wait for support. Search for stocks with relative strength and technical support. When this dip runs its course, be prepared to sell out of the money bullish put spreads. Yesterday we entered three new bullish put spreads and we have six positions that expire next week. We will closely monitor these trades and we will manage our risk. Time decay has already been working in our favor. We sell the spreads inside of a three week window so that we are able to continually monitor market conditions and take advantage of accelerated time decay. This is a time to be cautious and I've been urging you to reduce your long exposure for the last week. Day traders should watch for early selling this morning. We will test support at SPY $363 and an easy breach would be bearish. If that happens I suggest trading from the short side. If the market is able to bounce off of that level and we do not make a new low for the day after two hours of trading, focus on the long side. I have been able to find more consistent (orderly) and more sustained price action on the long side. Stay fluid and use the 1OP indicator as your guide. Support is at SPY $360 and $363. Resistance is at $367.50. . .

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