Watch For Profit Taking Ahead of Fed – SPY $235 Critical Support Level

March 7, 2017
Author: Peter Stolcers, Founder of OneOption

Posted 9:00 AM ET - Yesterday the market probed for support and it filled the gap from last Wednesday. After the initial move, the price action was lackluster. I expect to see nervous trading ahead of the FOMC statement (March 15th). Fed officials have been hawkish and the probability of a rate hike next week is 80%. Janet Yellen said that three rate hikes are possible this year. This is an aggressive agenda and it needs to be supported by economic growth. Global and domestic economic activity has been steadily improving. China posted strong PMI's last week and US ISM manufacturing and ISM services were strong (57+). ADP will be posted tomorrow and a number above 200,000 will solidify the chances for a rate hike. The mudslinging in DC is having less of an impact on the market. We've seen this arguing for the last couple of years and I believe investors are getting numb to it. It's time to execute the game plan. The market will give the GOP a few months, but the leash will be short. I believe we have reached the point where the Fed wants to get rates back to a normal level. They have been asking for help on the fiscal side for years and that is Trump's plan. The market will shoulder higher interest rates as long as economic growth is strong. We are in an environment where good news is good news. Strong economic releases will be market friendly. From a technical standpoint we need to make sure that SPY $237 holds. The next critical level below that is $235. If these support levels crumble the market will roll over. I don't believe this will happen. The more likely scenario is that we see a small round of profit-taking. Prices will stabilize and this dip will be a nice buying opportunity. Global and domestic economic conditions are improving, credit risks are relatively low, corporate and personal taxes will decline and reduced business regulations will increase profits. With global interest rates near an all-time low, equities remain attractive. There is also a major force that I don't often mention. Corporations have been buying back stock aggressively. There are half as many shares outstanding as there were 10 years ago. More money chasing fewer shares means that there is always upward pressure on price. Swing traders need to take a break for the next week. Provided that we get a rate hike, the market will pullback and that will present a nice buying opportunity. Day traders need to keep their powder dry as well. The recent pattern has been a decent move on the open and quiet trading in a tight range the rest of the day. This is not an ideal situation, but we have been able to find some nice stocks. Support at SPY $237 will be challenged again. I deem SPY $235 to be more significant and it could be tested before the FOMC. . . image

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