September 4, 2020
Posted 9:30 AM ET - Yesterday the market tumbled and we saw heavy profit-taking. In the last two weeks I have outlined why this would happen so I'm not going to rehash the details. The rally is over-extended and there is more work to be done on the downside. Buyers will be cautious and we will be able to gauge the appetite for stocks in the next few weeks. I believe that the support at SPY $338 will be tested in September. This morning the Unemployment Report showed that 1.37 million new jobs were created during the month of August and that was better than expected. I don't trust that number since it contradicts weekly initial jobless claims and the ADP report. In any event, this number will not weigh on the market today. Typically after a large round of profit-taking the market will stabilize. There isn't any news to generate panic selling. Bullish speculators have been flushed out of their positions and we are likely to inch our way higher in the next few days. I'm expecting SPY $350 to be tested on the upside and then we should see another leg lower. The market is pricing in a speedy recovery and the second wave of Coronavirus reduced Q3 consumption. I believe that stocks will need time to grow into current valuations. That could mean sideways movement the rest of the year or a pullback and then a rally. I believe the latter scenario is more likely. Swing traders with a longer term perspective should remain sidelined. I've been mentioning for two weeks that these moves are swift and painful. Yesterday the market gave back gains from the prior eight trading days. We have shorter-term out of the money bullish put spreads that will expire in two weeks or less. Microsoft is one of them and we will have to buy that position back today. That loss will negate a nice gain that we had on an Amazon bullish put spread that will expire today. I believe our remaining five bullish put spreads will perform well. Day traders should be careful on the open. I don't believe the market will be able to move higher until the bid is tested. Once support has been established I will be looking for stocks with relative strength. I expect to see a nice little bounce that recovers some of yesterday's losses. The drop yesterday was a warning and we are likely to see more profit-taking in the next two weeks. This bull rally will die hard and you can expect a choppy move lower. Support is at SPY $338 and $342.50. Resistance is at $350. Happy Labor Day! . .
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