FOMC Relief Rally Will Set-up A Shorting Opportunity – Sell Bearish Call Spreads

July 28, 2015
Author: Peter Stolcers, Founder of OneOption

I trade one very specific pattern and I use my platform and scanner to find it. We make money every day trading it. Today we caught a bunch of trades including AEGR. TAKE THE FREE TRIAL AND SEE OUR TRADES IN THE CHAT ROOM Posted 11:00 AM ET - Yesterday the market tested the 200-day moving average and support held. China's market dropped 8.5% and this was the worst decline in eight years. Many analysts are discounting the move, but I am not. An S&P 500 correction looks likely and it's time to prepare. China's market was up 80% in the last year and now it is only up 14%. Only 7% of the population has market exposure, but the crash will quickly spread to real estate where most citizens have invested. Those who do have market exposure are wealthy spend the most and they will reduce consumption. The PBOC might not be able to ease because inflation is on the rise. Trillions of dollars have been spent on government stimulus and their economic growth continues to slip. Decades of expansion have led to excess and credit concerns in their shadow banking industry could surface. China has been the world's growth engine for the last 10 years. It is the largest economy in the world and it is the key to US equities. The Fed will not show its hand tomorrow. They know that macro conditions are fragile and they don't want to spook investors during recess. The market will like the news and we should get a nice little bounce tomorrow. The market decline in China is a couple of weeks ahead of schedule. This changes my forecast. If you sold bullish put spreads last week, buy some of them back today. I suggest buying the rest back on any rally tomorrow. If you sold put spreads on stocks that were breaking out, you probably made money on these trades. I will be selling bearish call spreads during the next few days. I believe this next rally will set up an excellent shorting opportunity. Mega cap tech stocks did not attract buyers after posting results. This was the last remaining catalyst. China's market will continue to slip and concerns of a September rate hike will prompt profit-taking. The 200-day moving average will fail. Politicians will be on recess and there will not be any Fed speak to save the day. August and September are traditionally weak and we could finally get the long-awaited 10% correction. I believe the all-time high will hold through September options expiration. Consequently, I like selling out of the money call credit spreads this week. I will not buy puts until we close below the 200-day moving average. The 100-day moving average represents resistance and I don't believe the Fed rally will push us above it. Adjust your risk and maintain a slightly bearish bias. When the 200-day moving average fails, you can get more aggressive with short positions. My forecast is based on continued weakness in China. If conditions there improve, the SPY will chop around, but the all-time high will remain intact. Look for quiet trading ahead of the FOMC and a rally after the statement. . . image

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