Market Will Remain Nervous Into the FOMC – Wait For Support – Sell Bullish Put Spreads

Posted 10:00 AM ET - Yesterday, the market staged a nasty reversal. The S&P 500 rallied 28 points and it gave back all of the gains by the end of the day. This morning, we are seeing some follow-through selling. As I've been mentioning, this is a low probability trading environment. Your size should be very small and your risk should be limited. The recent price action tells us that no one is worried about missing a year-end rally. We are seeing profit-taking when the market challenges the high and buying when we test support. In my comments yesterday, I mentioned that I was not going to take any new positions. I wanted to get past China's economic numbers. They were mixed, but close to expectations and they did not have much of a market impact. I am in risk management mode. I sold out of the money December put credit spreads a few weeks ago and they are still profitable. The premiums have expanded and I don't want to buy them back because I feel that they will expire worthless. That means I need to temporarily hedge those positions while the market works off this selling pressure. I will short the S&P futures when we are below SPY $203 (Wednesday's low). I believe that major horizontal support at SPY $202 will hold. That is the breakout from October. The market should remain nervous through the FOMC meeting. It is very possible that we will test the 100-day moving average ($199) after the statement. The House passed a plan to extend the debt ceiling. It should be approved by the Senate today. Politicians want to go on recess and the market expects it to be passed. Low oil prices are starting to have an impact on Russia's credit. From a market standpoint, I believe energy stocks are close to bottoming (I'm not buying them yet). Most of the damage has been done to the energy sector and from this point on it will not weigh on the market is much. Consumer stocks should start catching a bid. Low gasoline prices are good for the economy. I am managing risk today. I will short the S&P 500 if it trades below $203. That will also be my stop. If we trade down to SPY $202 and we fall below it, that will become my new stop. I believe that support level will hold today. If we dip back below it, I will get short again and use $202 as my new entry and stop price. This is a very tricky market and if you are a swing trader, I suggest staying on the sidelines. If we get a pullback to the 100-day moving average next week, we could get a nice little bullish opportunity into year-end. I am much more interested in selling put spreads than I am buying calls. Premiums are inflated and I don’t know that we will get a big pop into year-end. The news will dry up after the FOMC meeting and that usually favors the bulls. Short-term traders and hedgers, use SPY $203 as your guide today. If we selloff, use SPY $202 as your guide. . .

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