Yellen Sugar High Did Not Last – Get Ready For the Next Wave of Selling

Posted 9:30 am ET - Yesterday Janet Yellen temporarily stopped the bleeding when she testified before Congress. As I mentioned in yesterday's comments, this sugar high would be very temporary. From the moment she started speaking, stocks pulled back. By the end of the day the 20 point S&P rally was erased and the market finished in negative territory. The S&P 500 is down 30 points before the open and SPY $182 will be tested. The Fed Speak rally was one of the easiest fades I have seen. Global economic conditions are deteriorating. China was the growth engine of the world and no one really knows how quickly their activity is contracting. China's shadow banking industry is as big as its regulated banking and massive credit issues are likely. Decades of hyper-growth mask bad investments and defaults are looming. Japan eased and interest rates are in negative territory. Last night, Sweden followed suit. The bottom line is that central banks are out of bullets. There was nothing Janet Yellen could say yesterday that would soothe investors. Domestic economic conditions have not been robust, but they've been better than the rest. Now we are seeing some cracks in the dam. ISM services and the Unemployment Report were weak. Fear of a credit crisis is widespread and the selling pressure is extreme. Earlier in the week I told you that major support at SPY $182 would be tested. We will spend more time at that level and we will break support in the next week. I have remained flexible with my day trading. Yesterday I shorted the S&P futures on the early rally and I bought some puts in Disney when the stock bounced. Both trades worked out well. I also bought some stocks throughout the day. We have been making money every day trading one specific pattern in my chat room. I've been mentioning this week that it is too early to sell bullish put spreads. The price action this morning explains why. The market has more work to do on the downside. If the market hits an early air pocket, I will look for strong stocks and I will buy them once support is established. If the market bounces early this morning, I will wait for that move to stall and I will short the S&P futures. I still expect to see some support at SPY $182. That level might be breached intraday, but we should be able to rally back above it. It will take a few attempts before it fails. When it does, $182 will represent resistance and the market will stage another leg down. This is been an ugly start to the year and we can expect persistent selling pressure the rest of the month. . .

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