Market Will Drop Into Fed Rate Hike Wed – Bounce Likely After Statement

Posted 9:15 AM ET - Friday tech stocks were hit hard. The "tech wreck" came without warning and we witnessed heavy profit-taking throughout the day. There is follow-through selling this morning and it should continue until the FOMC statement on Wednesday. Tech stocks have been pushing the market higher and the rally has been narrowly defined. Bullish speculators have piled into these names and they are getting flushed out. We've seen two big drops in the QQQ in the last few months and they’ve only lasted a day. Buyers stepped in and these stocks quickly recovered. I am not going to discount the selling pressure. Technology stocks seem "frothy" and one of these drops will gain traction. Investors are nervous ahead of the FOMC statement and I've been warning you about this for the last week. Economic growth is moderating and the Fed will raise rates. This is a dangerous combination. Wednesday morning China will release industrial production and retail sales. This number could be a little light. The market typically declines ahead of FOMC statements and it rallies after the news. That will probably be the case this time as well. The Fed will soften the blow by saying that they are done raising rates for a while. Look for nervous trading and a decline into the FOMC statement. Once the low is established conditions will stabilize and we are likely to see a bounce. Republicans are trying to repeal Dodd/Frank and that is bullish for financial stocks. This sector is critical to the market. I'm also reading that the GOP is trying to get tax cuts through in July. A concerted effort (even if it doesn't get passed) will be market friendly. Swing traders need to keep their powder dry for a few more days. Any market decline will set up an excellent opportunity to sell out of the money bullish put spreads. Once the market stabilizes trading volumes will decline and the range will constrict. Option premiums will be fairly rich and you can distance yourself from the action. The summer doldrums are just around the corner and we want to take advantage of time decay. Day traders get ready for a busy week. The trading ranges will be wide and the volume will be brisk. The downside will be tested early. The heavy selling from Friday is a warning sign. Any stock that has been on a tear will be ripe for profit-taking. Many of these stocks will bounce, but don't be lured in. Once the bounce stalls you will see additional selling. I will be looking for stocks that closed near the low Friday and that did not bounce with the market in the last hour. I will also be looking for stocks that are not able to bounce with the market this morning. That will be a sign that sellers are still close at hand and that these stocks have more downside. Favor the short side for the next two days. Friday is a quadruple witch and that will add volatility to the market. Get ready for a busy week. . .

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