Watch China’s PMI – It Will Set the Tone This Week – SPY $195 Is Pivotal

Posted 9:30 AM ET - Last week the market probed for support and it reversed violently from the SPY $187.50 level. The rebound pushed us through horizontal resistance at $195 and that support level held Friday. The S&P 500 is down slightly this morning and it will be tested. The buying we saw last week was encouraging. A decent round of news this week could spark a rally to the 100-day moving average. That is also a horizontal resistance level and SPY $200 will present an excellent shorting opportunity if we get there. Provided that the market likes the news this week, I will sell some out of the money bullish put spreads and I will lean on support at SPY $195. Given that the market has limited upside, I don't want to purchase calls. Furthermore, the news will dry up after this week and that also benefits premium sellers. This is a critical juncture and support at $195 could fail. If that happens, I will sell out of the money bearish call spreads. Option implied volatilities are still fairly high and I don't want to buy puts when the downside is relatively contained ($187.50). From a day trading standpoint, I am finding excellent opportunities on both sides. The market has rallied far enough off of support that shorting opportunities are surfacing. Weak stocks have rallied to resistance and they have not participated in the last leg of the market rally. This tells me they are ready to roll over. There are many great stocks that have not bounced and they still have plenty of room to run. I am using the first hour range as my guide and that has worked well. China's official PMI's will be released tomorrow and I believe this is the biggest news of the week. The selling in January started in China and we haven't had any economic news in a couple of weeks. Their market was down 6% last Wednesday and the PBOC cut bank reserve requirements overnight. The reaction overnight will set the tone for global markets the rest of the week. Initial jobless claims have been steady the last few weeks and that is consistent with a jobs report in the range of 180K to 200K. This would be a market friendly number. This range would keep the Fed sidelined and it would be an improvement from last month’s number. Anything around 150K would spark selling. ISM manufacturing around 49 would be good and ISM services north of 53 would be good. These numbers should hit these levels and they won't be much of a factor. My heart tells me that the market is fairly comfortable in a range between $188 and $194. Fear has subsided and there aren't any catalysts to attract buyers. Until we have news one way or the other, the market could trade in this range. The best case scenario would be a rally to SPY $200. Option implied volatilities would decline and puts would be cheaper to purchase. We would have a better entry point for shorts and from the $200 level the market has much further to fall than it does from current levels. I hope this unfolds, but I think the probability of it happening is less than 35%. We are at a critical juncture. The market will either rally above $195 and we will use that as support or it will fall below $195 and we will use that as resistance. We want to lean on this $195 level and China's PMI will push us one way or the other. The news is heavy this week. We should see a nice volume and movement. . .

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