Get Ready For the Second Bounce – Earnings Will Attract Buyers

Posted 9:45 Am ET - Free webinar tonight. CLICK HERE to register. Yesterday, investors were spooked by weak economic data in Germany. Their industrial production fell 4% and they are the largest economy in the EU. Once the momentum was established, buyers pulled their bids and we hit an air pocket. I had a large position on and I was not going to let it slip away. I sold my calls 90 minutes before the close when the SPY made a new intraday low. My purchases on Thursday and Friday were good and my last leg on Monday was not. I lost about $.50 based on my average cost. I mentioned a market adage that I have posted on my desk, "the second mouse gets the cheese". That is why I prefer to sell out of the money put credit spreads on the first reversal below the 100-Day MA. We always get a retest. The second bounce is the one you can aggressively trade and I still believe we are setting up for it. Sometimes the bottoming process happens quickly and other times, it takes a week or two. We are likely to probe for support this morning. We are likely to challenge the low from Thursday (SPY $192.40). If we briefly touch it and the market reverses sharply, I will buy calls. If I see follow-through buying, I will add. If the market drifts lower all day, we are likely to challenge major support at SPY $190.40. That is the four-month low that was established on August 7th and it is also the 200-day moving average. I believe we will rebound sharply before we touch it. Analysts won't change their forecasts based on one dismal economic data point. Germany's industrial production can easily recover if the data was tainted. The pressure is on and Germany might consider fiscal spending to stimulate growth. The bigger problem is that the ECB has fired all of its bullets. Draghi pretty much admitted that last week. If conditions continue to weaken, Europe will have to work its way out of this economic downturn without any artificial support. This afternoon, the FOMC minutes will be released. Fed officials are more hawkish than Janet Yellen and the news could spook investors. Disinflation is becoming a concern and that could keep the Fed accommodative longer than expected. I don't believe they will remove the phrase "considerable time" until December. First they want to end the bond purchase program. Interest rates have been falling even though the domestic economic releases have been strong. Global investors are buying US treasuries (flight to safety) and that is keeping yields low. Earnings season kicks off today. Banks will dominate the scene next week and that should set a positive tone for the market. Money has to flow somewhere. Global yields are tiny and I believe investors will embrace US equities. I am not going to trade against a five-year bull market and seasonal strength. I will wait for this bottoming process to run its course and I am will buy calls on the next reversal. The magnitude of this bounce will tell me how 2015 will line up. If we can't challenge the all-time high, a double top will have formed and that is a bearish sign. It is way too early to draw that conclusion. I was early with my first attempt to get long. I executed my exit strategy and I kept my losses small. Now I'm waiting for an opportunity to get back in. I won’t get too aggressive until I see the reaction to the FOMC minutes, but I am ready to buy calls. Once buyers come in, we want to see steady buying for at least a few days – no looking back. If the market drifts lower all day, stay on the sidelines and wait. . .

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