Use These S&P 500 Levels As Your Guide – Wait For the Breakout

January 24, 2017
Author: Peter Stolcers, Founder of OneOption

Posted 9:20 AM ET - The S&P 500 continues to trade within a 10 point range. We've been trapped here for a few weeks and this is a low probability trading environment. The good news is that long tight ranges produce big breakouts. We have to be patient and wait for one side to prevail. On the bullish side of the ledger we have decent earnings and the prospect for optimistic guidance. Lower corporate taxes and reduced business regulation will provide a healthy backdrop for profits. On the bearish side of the ledger we have rising interest rates and a Fed that plans to aggressively hike this year. We don't know how successful Trump will be in executing his game plan. He is likely to hit stiff opposition, but he’s a fighter. We also don't know if current economic growth is strong enough to shoulder three rate hikes this year. Trump's unconventional rhetoric will keep politicians/the media/sovereigns off balance. This is his edge and he uses it to negotiate deals. The market hates uncertainty and I predict that there will be a stretch this year where we wish we had calm trading days like this. Stocks opened on a weak note yesterday and they looked like garbage. By the end of the day buyers stepped in and the market looked ok. Google, Intel and Microsoft will post results after the close Thursday. These mega cap tech stocks will keep buyers engaged for the next few days. Earnings announcements are starting to ramp up and trading volume should improve. The first line of order is a breakout from this range within a range. The SPY needs to close above $227 or below $226. Then it needs to take the next step and close above $228 or below $225. After that we need to see follow-through with increasing volume. It might seem like a lot of conditions have to be met, but it can all happen very quickly. Until we breakout of the current pattern, be patient and keep your trading size small. Once we breakout we will see a sustained directional move and we will ramp up. My bias has been bullish and I expected to see a new all-time high in January. Given that we are a week away from the FOMC meeting, that is less likely. Asset Managers will wait for the statement. Fed officials are divided. Trump plans to increase fiscal spending on infrastructure but we don't know if his plan will be to approved by Congress. If he's successful it will sway the Fed vote. There are many moving parts and we don't need to predict the outcome. We just have to watch the technical support/resistance levels. When they are breached we will jump into action. Keep your size small until we breakout. The market is dead flat this morning. Tech stocks are up a little and so is oil. I plan to sit out the first hour. I need to see a directional move and I don't want to get trapped on the wrong side. Once I see that move I'll be able to gauge the strength and then I will start trading. In all likelihood, the first move will eventually stall and then the market will reverse. That's when I will have an opportunity to fade that first move. My trading size will be small so today will not make or break me. By staying engaged, I will know where to find opportunities when we get a significant market move. . . image

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