A Market Reversal Today Would Be Bearish. Buy Puts Below SPY $185 – Keep It Small

Posted 9:00 AM ET (Pre-Open) - Yesterday, the market opened with a bang and it closed with a whimper. Stocks tried to rally out of the gate and profit takers stepped in. That was the second reversal in two days. A pattern where the market opens on its high and closes on its low is bearish. There wasn't much overnight news, but the market is trying to rally this morning. If this early rally reverses, we are likely to breach horizontal support at SPY $185 today. If this happens, bullish speculators will get flushed out and we will hit an air pocket. I bought puts last Friday and I added yesterday. My position is small and my stop is SPY $187.50. Resistance is mounting at that level and a breakout would be bullish. If the market closes below SPY $185 today, I will add to my put position. This is a very low probability trading environment and I'm keeping my size small. The market has been chopping around the last four weeks and option buyers are losing money. We need a breakout/breakdown with follow through. The economic news is light the rest of the week (durable goods and GDP). Traders will be expecting better numbers now that weather conditions are improving. The flash PMI's were soft this week. China was the focal point and they missed by a wide margin. Bulls are hoping that fiscal spending will keep growth at its current level. The PBOC does not plan to ease. Janet Yellen hinted that tightening could be a year away and interest rates will creep higher. Bond Managers will not wait for the decision; they will start gradually adjusting positions now. Higher yields will provide a small headwind for the market. I feel that the market won’t be able to move higher until bullish speculators are flushed out. Once support is established, Asset Managers will bid for stocks into earning season. They will not chase the market at this level. I didn't trust yesterday's early rally and I day traded from the short side. I don't trust this morning's rally and I will be looking for an opportunity to get short. If this little rally does not hold, we could see a nasty round of selling this afternoon. Buy puts if the SPY is below $185. Add to the position if the SPY closes below $185. . .

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