Buy Puts – Reversals Are A Sign of Selling Pressure – Support At SPY $185 Will Fail

Posted at 9:00 AM ET (Pre-Open) - The market had has been whip sawing in a tight range the last couple of weeks. Support is strong at SPY $185 and resistance is strong at $187.50. We finally look like we will break out of this range. The S&P 500 has opened higher and reversed each of the last four days. That is a very bearish pattern and it is a sign of exhaustion. Traders have been willing to put a positive spin on every piece of news. China's flash PMI was weaker than expected, but the focus has been on the new fiscal spending programs. The shadow banking system in China is a concern, but there have not been any defaults in the last few weeks. The ECB is worried about disinflation, but the focus is on Draghi's statement that he will push interest rates into negative territory to encourage spending. US economic data has been soft, but bad weather is to blame. The Fed continues to taper, but that must be a sign of economic strength. Brazil's credit was downgraded by two notches (just above junk), but credit concerns won't spread past South America. Russia annexed Crimea, but most believe they will not advance further. As you can see, there are plenty of issues. The market is struggling to make a new high and there is a significant amount of profit taking. Asset Managers won’t buy near an all-time high and they will pull their bids. Bullish speculators are about to get flushed out and we could hit an air pocket. Bonds are rallying which is counter-intuitive when the Fed is tapering and economic growth is strong. I believe this rotation is a flight to safety. Options implied volatilities have also moved higher and they have maintained that level. This is a sign of hedging and we could be in “risk off” mode. Durable goods orders were in line, but ex-autos the number came in a little lower than expected. This is a volatile report and it did not have much of a bearing on the market. GDP in initial claims did not have much of an impact. The recent reversals have been very nasty and I believe we will see another one this morning. Once the early bounce stalls, sellers will probe for support. SPY $185 will fail and the pressure will build. We should have an easy path to the 100-Day MA ($181.90). Buy puts this morning and add to the position if we fall below $184. Stop the trade out if we close above $185. These comments were posted an hour before the open. . .

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