September 21, 2020
Posted 9:30 AM ET - Last week the S&P 500 closed below its 50-day moving average. Support has been tested frequently at that level and the market has not been able to sustain a decent bounce in the last two weeks. That suggests that the selling pressure is heavy and that there is more work to do on the downside. This morning the S&P 500 is down 50 points and a test of the 100-day moving average seems likely this week. Republicans and Democrats are at odds and a stimulus bill is unlikely before the election. Small businesses need a lifeline after the second wave of the Coronavirus hampered economic activity. As I mentioned last week, 60% of the restaurants that have closed will go out of business. The death of Supreme Court Justice Ruth Bader Ginsburg will weigh on investors. Many states have approved mail in voting and the election results may not be known for weeks. It is very likely that the Supreme Court could have to decide the election outcome and if there are only eight justices there could be gridlock. The market hates uncertainty and this dark cloud is growing bigger. Europe is seeing a new wave Coronavirus cases and much of the continent is shutting down. At a current P/E of 22, stocks are rich. We have seen signs of profit-taking the last two weeks. Swing traders with a longer-term time horizon are in cash. We knew that this market decline was possible and we will wait for support. The market is in a five-month bull rally and an 11-year bull rally. These market drops are difficult to trade if you're not able to watch the market during the day. Snapback rallies are violent and longer-term traders should not try to time them. We will have an opportunity to sell out of the money bullish put spreads on strong socks and trading from the long side is much more consistent. We want the wind at our back (long term trend). The key to trading this long term rally is to avoid these market pullbacks - that is why we are on the sidelines for longer-term trades. Be patient. The tug-of-war between buyers and sellers has been resolved to the downside. This morning, the SPY will test support at $323.50. It's hard to tell how the day might unfold. Last Thursday the market gapped lower and it bounced. We ultimately drifted back down to the low of the day and then traded sideways. The shallow bounce during the last two weeks is a sign that sellers are in control. Support has been breached and buyers will be relatively passive this time around. I'm expecting the downward momentum to accelerate. If the market makes a new low for the day after two hours of trading we can expect a bearish trend day. In the video I recorded last night, I mentioned that mega cap tech stocks (AAPL. GOOG, MSFT, AMZN) look weak. It will be hard for the market to rally without these giants. During the last week I have suggested flipping through daily charts and drawing upward sloping trend lines. As those trend lines are breached the alerts will be trigger and you will have excellent entry points for bearish trades. These moves happen quickly and there won't be time to hunt for the opportunities. Your focus will be on managing current positions. I believe that any market bounce this morning will be relatively brief. The selling pressure is obvious and the bid will weaken. If the market closes on its low of the day and if your shorts close on their low, hold short positions overnight. Set aggressive targets and take generous profits when they are available. Support is at SPY $323.50 and the 100-day moving average. Resistance is at the 50-day moving average. . .
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