No Market Rally Until We Hit An Air Pocket – SPY $187.20 Will Be Tested

Posted 9:40 AM ET - Yesterday, the market probed for support and it fell below SPY $192. The mood is extremely pessimistic. Once the selling momentum started we never saw an uptick. The SPY is just above the closing low from August ($187.20) and I believe that support will be tested today. It is unusual to see huge back-to-back declines and I feel that level will hold for now. We won't see a meaningful rally until we hit an air pocket. The bottom will drop out and we will see a sharp intraday reversal that never looks back. That will mark a capitulation low and we could test SPY $182 in the process. Asset Managers want to buy stocks, but they will wait for support. Earnings season will start in two weeks and the results will be decent. Global economic conditions are sluggish, but they are not dire. The Fed wants to hike rates this year and that dark cloud will be looming. When we do get a bounce, we might make it back to SPY $200. I am not looking for a sustained rally through year-end. Once that bounce runs its course, there will be an excellent shorting opportunity towards the end of the year. Given the recent price action and the technical breakdowns, 2016 could be ugly. The early bounce this morning can be faded. I will buy deep in the money SPY put options that trade at parity. I want high deltas so that I can take profits along the way. Do not buy out of the money options. Premiums are extremely rich and the options don't move. I will not short individual stocks because I want to be able to move in and out quickly. By focusing on one very liquid instrument, I can accomplish this. I still want to day trade stocks from the long side and I will be looking for these opportunities as well. The market drifted lower all day yesterday so I only got a couple of small trades off Monday. My stops were tight and my losses were small. Once I missed the decline, I sidelined myself. I've learned over the years that chasing typically a costs me money. I enter at a bad price and the position instantly moves against me. When I'm forced to take my losses and I feel like an idiot. I hate losing money more than I like making it. The market should test support at SPY $187.20 today and I expect that level to hold. In the next week or so I expect to challenge SPY $182 and I expect to see a capitulation low. Once that pattern surfaces, I will aggressively get long. . .

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