Market Top Forming – Look For More Profit Taking – Gap Will Fill

Posted 9:00 AM ET - Yesterday we saw a nasty round of profit-taking. The selling pressure from Wednesday afternoon spilled over and stocks closed on their low Thursday. I've been telling you that this rally would not end on a down open. It would end on a gap higher and a reversal. If you combine the candles from Wednesday and Thursday, that's exactly what you have. I advised you to take profits on half of your positions early Wednesday morning and this is exactly why. The SPY rested on support at $238.40 yesterday. That was the open from Wednesday and it will be breached this morning. There is little doubt that we will fill in the gap from Wednesday. If the market trades below SPY $238 after an hour of trading - stop out on all long positions. The key to this reversal will come next week. If the breakout at SPY $237 fails we will see more selling. Anyone who bought the breakout will be flushed out and additional profit-taking will set in. In my comments this week I have noted that the probability of a rate hike is around 80%. The FOMC meeting is on March 15th and I believe we will see selling pressure into that meeting. Swing traders need to focus on exiting remaining long positions if the market can't bounce this morning. I would also suggest buying a few SPY April puts if we are below $238 after the first hour with a target of $237. If the market closes above $238, stop the put position out. Day traders should wait for the first hour to unfold. I suspect that any bounce will be a good shorting opportunity. It would be typical for that market gap to fill after a reversal. On a longer-term basis I'm not throwing in the towel. Stocks got ahead of themselves and the threat of a rate hike will prompt investors to lock in profits. After the FOMC meeting buyers should return. The price action in the last day and a half of trading has been bearish. This was the sign we were waiting for and it's time to cash in. Exit long positions and look for shorting opportunities. Go small if at all. The trend still points higher. . .

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