Market Upside Is Small – Take Profits On Longs – “Ugly Day” Is Coming

July 29, 2016
Author: Peter Stolcers, Founder of OneOption

Posted 9:30 AM ET - The S&P 500 is compressing in a very tight range. Hawkish FOMC rhetoric did not spoil the rally, but excellent earnings from mega cap tech stocks (Google, Amazon, Facebook and Apple) did not attract buyers. Tech stocks (QQQ) have broken out to a new high, but the rest of the market is sluggish. Official PMI's will be posted Monday morning. China will be of greatest interest since it no longer publishes a flash PMI. Economic conditions in Asia and Europe are improving slightly. Japan is expected to announce a new round of stimulus next week and the EU is considering another round of monetary easing. Next week the big economic release is the jobs report. I believe a number greater than 200,000 will be well received initially. However, as August wears on profit-taking will set in. Traders will fear a September rate hike. The strongest companies announce early in the earnings cycle and the back half should be lackluster. Good news is priced in and the market will have a difficult time advancing. Bears are not going to short the market when it is making a new all-time high. The momentum has stalled and they will get a little more aggressive with each passing day. Traders typically don't like to short ahead of mega-cap tech earnings releases. Now they are out-of-the-way. I’m not expecting an instant market decline. We are in the summer doldrums and this compression could last another week. I suggest exiting overnight long positions. If you're following my advice you’ve been scaling out this week and reducing risk. The upside potential is smaller than the downside risk. At very least we will test the breakout at SPY $213 in the next two weeks. I still prefer trading from the long side. I believe Amazon and Google will provide a market bid today. I am spending more time looking for shorts each day and there are some really nice setups forming. Given all of the news (earnings reports and FOMC), I expected robust price action and nice moves. The market is very sluggish. I'm able to find nice day trading opportunities, but patience is required. I am setting relatively passive targets because I know I don't have a market tailwind. The market should be able to tread water for a few more days, but the selling pressure will build and the probability of an "ugly day" is increasing. Use SPY $215.75 as your guide. If we are above it favor the long side. If we are below it favor the short side. . . image

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