Buy Puts If This Support Level Is Broken Today

Posted 9:40 AM ET - The market traded in a very narrow range yesterday and tech stocks showed signs of strain. The QQQ lagged the SPY all day and we can expect profit-taking on the high flyers. Oil is bouncing and there will be some rotation into energy stocks. The trading range the last few days has been extremely tight and we are in a news vacuum. Expect more of the same today. Financial stocks needed to participate in this rally for meaningful breakout to have materialized. Banks are lethargic and the market won't get help from this sector. Healthcare stocks are waiting for the bill to get passed and that is months away from happening. Basic material stocks rely on strength in China and their economy hit a snag. China will post industrial production/retail sales/GDP on Monday and that will be a significant number. Lower pump prices are good for consumers and some retail stocks are moving higher. In aggregate, the market lacks leadership and the recent rally has been narrowly confined to tech stocks. The Fed will take advantage of the recent market rally and they will hike in June. The closer we get to that date the greater the likelihood of a market pullback. Tax reform is all the market cares about and the mudslinging in DC continues. Investors will grow impatient and the wonder if the gridlock can be broken. My bias is bearish but I'm not looking for a massive market decline. I'm looking for a pullback to the 100-day MA and we could test major horizontal support at SPY $232. Such a move would fill in the recent gaps. Once support is established investors will evaluate conditions (economic growth, tax reform and interest rates). I have been suggesting that swing traders wait patiently on the sidelines, but I am changing my tune. If the SPY closes below $239, buy some ATM July puts. This position should be half of your normal size. If the SPY closes above $241 stop the trade out. Plan on carrying this position until the June FOMC. If the market drifts lower we will lower the stop and lock-in profits. Swing traders can also buy VIX. Any market decline will cause option premiums to rise. Day traders can use SPY $239 as a guideline. If we are above it favor the long side and if we are below it favor the short side. The daily range has been tight so keep your size small. If the market makes a new low after the first two hours of trading I will be more aggressive (size up) with my shorts. The downside will be tested this morning, let's see if there is profit-taking. The next support levels are SPY $238 and $236.50. Late day selling would be bearish. . .

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