Profit Taking Will Flush Bullish Speculators Out – Buy A Few Puts Below SPY $199

Posted 9:20 AM ET - The market feels heavy. A few weeks ago, we broke through resistance at SPY $199 on light volume. Traders returned after Labor Day and stocks have not been able to advance. The FOMC will release its statement next Wednesday. Many analysts believe that the phrase "considerable time" will be removed or altered. That would signal that the Fed's timetable for tightening has been moved forward. Even if the language does not change next Wednesday, Bond Managers will be selling bonds on every strong economic release. They know that the focus will shift to tightening when the bond purchase program ends in October. Interest rates will creep higher and the market will have to go through an adjustment phase. If the SPY trades below $199, we will have a failed breakout. That is significant because it flushes out bullish speculators. Call buyers who piled in on the breakout at SPY $199 will exit their positions. This selling can accelerate quickly. I believe we will see profit-taking into the FOMC statement. The Fed will keep the phrase "considerable time" in their statement and the market will rebound. Unfortunately, that bounce won't last more than a week. There are a number of speed bumps that we need to navigate in the next few weeks (the debt ceiling, health insurance premium hikes and the end of the bond purchase program). The SPY is likely to roll over and test the 100-day moving average. Once support is established, the market will stage a year-end rally. My timetable is the middle of October. This forecast makes a number of assumptions and there are many moving parts. Consequently, I'm not going to concern myself with anything more than few weeks out. If the selling pressure builds this morning and we make a new low after a couple of hours of trading, I will buy puts. I will allocate 20% of my normal trade size and I want to keep my risk relatively small at this stage. My plan is to hold onto that position until the FOMC statement. If the market bounces this morning, I will stay on the sidelines and look for day trades. If you are long calls stop the trades out if the SPY is below $199. Normally, I use the closing value – not today. If we break below $199 the selling pressure will be gaining momentum and you need to get out. . .

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