Market Will Test the 100-Day MA This Week – Put Buyers – Set Targets – Use Stops

Posted 10:15 AM ET - Last week, volatility returned. Big declines were followed by sharp rallies the last four days and the Dow had a number of 200 point moves. This morning, the low from Thursday has been breached and we should see heavy selling throughout the day. Protests in Hong Kong seem to be the catalyst du jour. China's markets will be closed this week for holiday. Riots in Hong Kong, weak durable goods orders, airstrikes in Syria, rumors that Russia was going to seize private investments, Scottish independence and potential terrorist attacks in subways have been blamed for the soft price action. Personally, I believe that bullish sentiment was too high and this is nothing more than profit-taking. Bullish speculators are getting flushed out and the SPY is likely to test the 100-day moving average. Traders are worried that the Fed might tighten sooner than expected. That means good news is bad news. This week we will get a heavy dose of economic releases (PMI's, ISM manufacturing, ISM services, ADP and the Unemployment Report). The PMI's will be mixed (the EU will be weak, China will be okay and the US will be strong). Analysts are expecting 215,000 new jobs in September. If the unemployment rate falls below 6% (Fed's target), traders will expect that the phrase "considerable time" will be removed from the FOMC statement in October. Interest rates will creep higher ahead of the FOMC and the price action will be nervous. I believe the Fed will keep the phrase in this month. They want to end the bond purchase program first and they know that the focus will immediately shift to tightening. Price stability is one of their objectives and I don't believe they will hit the market with a "double whammy". They want to finish the year on a strong note and they know that November elections could also impact the market. The bid will grow as earnings season approaches and buyers will remain engaged. Corporations saw nice revenue growth last quarter and the guidance was strong. Nike and Micron posted strong numbers last week. Even after a strong round of economic releases this week, interest rates will not spike. Global yields are low, central banks are easing (ECB, PBOC and BOJ), inflation is low and uncertainty attracts US treasury buyers (flight to safety). These factors will keep a lid on yields. Even when the Fed removes the phrase, interest rates will not spike (gradual move higher). I would like to get through this adjustment phase so that we don't have to constantly look over our shoulders. Unfortunately, I believe the Fed will hold off as long as possible. We will have a nervous year-end rally. If you are a nimble, stay short and set your profit target at SPY $195. I will day trade from the short side, but I don't want to hold overnight. If the market makes a new low after the first hour of trading, we will drift lower the rest of the day. We could test SPY $195 if the momentum accelerates. Bullish speculators will ultimately get flushed out and the 100-day moving average will be breached. Once that happens, I will wait for the bounce and I will sell some out of the money put credit spreads. The market will challenge that support level a second time and we will see a sharp reversal. On this second bounce, I will buy calls. The bid is still relatively strong and we saw that last week. Each decline was followed by a sharp rally. If you are a swing trader, don't buy puts - focus on the long side and wait for the second bounce. The better move will come on the upside. This dip is the move with been waiting for. Wait for this selling to run its course. . .

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