Bearish Sign For Market Longer Term – Here Is How I Will Trade Today

Posted 9:30 AM ET - The market finished the year on a whimper. Seasonal strength was not enough to offset selling. This is typically a very bearish sign and the S&P 500 will start the year off on a negative note. Two weeks ago we saw a nasty reaction to the FOMC. Major support levels failed and that was a warning sign. I advised you not to sell out of the money put credit spreads and I hope you took my advice. Normally this is a good December strategy, but I did not like the backdrop. I have been day trading the last two weeks and I have been keeping my overnight risk at a minimum. This strategy has worked beautifully and I will be day trading today. This early decline seems overblown. I will wait for the low to be established and I will buy stocks on the bounce. Once that bounce runs its course, I will be quick to take profits. The next move will be more telling and two scenarios could unfold. The market will probe for support and the low of the day will be challenged. If the market makes a new low, I will buy SPY puts (small size). We will be below major support and I want to have a bearish trade on that I can exit quickly. If we do make a new low today after a few hours of trading, we will likely hit an air pocket. I think this scenario has a 30% chance of playing out. The second scenario is that the SPY will make a higher low after probing for support. This would be a sign that we will get another nice bounce and I will reload my longs. I will exit them before the end of the day and I will not hold long positions overnight. I see this as the more likely scenario today. China's market was down 8% overnight. Chinese investors are nervous and their government prohibits selling during these big declines. That destroys confidence and I believe the problem will be contained to China. Official PMI's were posted this morning. China's numbers were decent and Europe came in better than expected. US job reports should show growth above 200K and we will get ADP on Wednesday. This news should stabilize our market. The most important thing is to start the New Year off on a positive note. This "horse" is out of the gate and we don't want to make any foolish mistakes. I hate trading out of the hole so I'm going to take it easy today. On a longer-term basis, I believe we will be in a mode of shorting into rallies. The technicals are bearish and the market feels very toppy. If the first scenario plays out, buy some puts and hold overnight. If the second scenario plays out, try to make some money on the long side and exit your positions before the close. . .

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