Market Needs To Dip – If It Treads Water We Will Fall Into A Tight Trading Range

Posted 9:20AM ET - We caught the dip in October and the bounce. Last week I told you to take profits on your longs. If my market comments have helped you make money, please take a few minutes to POST A REVIEW ON INVESTIMONIALS Yesterday, the market pulled back on weaker than expected Black Friday sales. Stocks have not been able to advance in more than a week and we should see a light round of profit-taking. Bullish sentiment is extremely high and speculators need to get flushed out. The damage should be relatively contained and support at the breakout (SPY $204) should hold. Asset Managers won't chase stocks at an all-time high, but they would buy at that level. We are in the heart of seasonal strength and I don't like trading against it. I am short out of the money put credit spreads from a few weeks ago and I sold a few out of the money call credit spreads last week. I am also long handful of puts (5% of my maximum allocation) and they are on a short leash. The market will try to bounce this morning. If the move does not gain traction, we will probe for support. A gradual drift lower and a close near the low of the day would suggest that the $204 level will be tested. On the other hand, if stocks find a bid and we grind higher, we might not get a dip. Holiday shopping was a little soft, economic conditions in China and Europe are fragile, Japan's credit rating was downgraded, and oil prices are tanking. These are not rally killers, but they could spark a little profit-taking - especially in high-flying stocks with lofty P/Es. US economic statistics will be strong this week and good news is priced in. ISM manufacturing was better than expected yesterday and tomorrow we will get ISM services, the Beige Book and ADP. Most analysts believe that the Fed's timetable has been pushed back from May and strong data this week will not spark fear of tightening. Translation: inline results won’t spark selling. Earnings growth was higher than we've seen in years and companies continue to buy back shares at a record pace. Interest rates are near historic lows and equities are attractive relative to bonds. I believe the market will have to take one step backwards to move two steps forward into year-end. That dip will flush out bullish speculators and it will reveal the strength of the bid. Once buyers step in, we should be able to sling shot to a new high in the last week of 2014 trading. If I don't see follow-through selling today, I will take profits on the puts I bought last week. I will keep my credit spreads on. I have cushion on both sides and time decay is already taking effect. Trading volumes are anemic. We are seeing some of the lowest levels of the year. If you have not been selling premium the last few weeks, you've missed that opportunity. Option implied volatilities have collapsed and you're not being reported for the risk. I would not sell any premium now. If we get a pullback to SPY $204, you can sell some out of the money put spreads on support. Call buyers, wait for a dip. If the market does not pullback, I believe we will chop around in a tight range. Time decay will become an issue. I would not suggest buying puts. Don't trade against seasonal strength. I was able to enter at a good price on Friday and my position is small. If I don't like what I see today, I will take profits. We will see a small tug-of-war today. Bulls will see if they can spark a bounce and bears will challenge the bid. The outcome will determine where we go the rest of the week. As you can tell from my comments, this is a low probability environment – KEEP IT SMALL OR STAY ON THE SIDELINES. . .

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