Market Drop Is Not Over – Here’s How To Manage Your Puts

Posted 9:30 AM ET - Yesterday the market suffered its largest loss of the year. The selling pressure was steady and we closed near the low of the day. Investors are in "risk off" mode and they are shifting money out of stocks and into bonds. This flight to safety has flattened the yield curve to levels we have not seen since 2007. When the market can't bounce during the day it is a sign of heavy selling. Each time buyers test the offer it is replenished and a steady downward trend line is established. This is not a casual round of profit-taking, it is asset reallocation. The dark clouds are mounting. Global economic deceleration is at the forefront. China's industrial production and retail sales came in much lower than expected. Hong Kong just lowered its GDP forecast for 2019 to flat. Germany's Q2 GDP fell .1% and another negative quarter would officially put the largest economy in the EU into recession territory. This macro-economic backdrop prompted central banks to cut rates (US, India, Thailand and New Zealand). Central banks are easing is much as possible and many of them are "out of bullets". The US treasury yield curve has inverted and that is a bearish sign. England is preparing for a hard exit. If this happens it will send a shockwave through credit markets. Credit concerns are currently minimal, but the tide is going out and soon we will find out who's not wearing a swimming suit. As global economic conditions deteriorate credit defaults will surface. Argentina is on the ropes. Credit is the most critical piece of the puzzle. As long as concerns are manageable the market will tread water. I will be monitoring credit markets very closely and I'm not expecting any issues this year. With global yields below inflation levels bond investors lose money (purchasing power). They are pushed out on the risk curve (into equities) to generate a reasonable return. If credit concerns start to surface we will see sustained selling as they hit the exits. For now, the market bid should be fairly strong at lower levels (200-day MA). This morning retail sales, the Philly Fed and Empire Manufacturing came in better than expected. Domestic numbers have been slipping, but they are still at strong levels. Swing traders got short/bought puts after the first hour of trading yesterday when the market made a new low for the day. I believe we will see an early bounce and continued selling. Use your entry price as your stop. DO NOT LOSE MONEY ON THIS TRADE. Set a target at SPY $282 for half of the position and sell the other half at the 200-day moving average. The market won't rally until the downside is tested. We are only one ugly day from the 200-day moving average and I believe it could be tested this week. Day traders should let the early bounce play out. When the momentum stalls, get short. I am going to favor the short side until I see a deep low and a bullish hammer that is followed by consecutive green bars. That would be a sign of support. Resistance is at SPY $286 and $288. Support is at $282 and the 200-day moving average. The price action has been extremely volatile day-to-day. I still believe that there is more room on the downside. It will be a choppy ride lower that will present very short-term trading opportunities on both sides. . .

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