Wait For the Flash PMIs Monday. China Has Been A Dark Cloud – Market Might Not Care

Posted 9:35 AM ET (Market Open) - Yesterday's rally erased all of Wednesday's losses. Traders had a day to digest Janet Yellen's statements and buyers stepped in. Once again, the market is within striking distance of the all-time high. Resistance at this level has been formidable. Each breakout attempt has resulted in a sharp reversal. The true test will come Monday. Flash PMI's will be released and we can expect weakness in China. Goldman Sachs lowered their projection for Q1 GDP to 6%. If they are remotely close, global markets will react negatively. The government is stepping up infrastructure construction, but it might be too late. The news Monday morning will have a silver lining. Economic activity in the US and in Europe will be strong. To this point, China has been a focal point. A gradual economic slowdown could push overleveraged financial institutions into default. Their shadow banking system is enormous and some borrowers have pledged copper as collateral. Rumor has it that those same reserves have been used many times. The price of copper is falling and some borrowers might be forced to raise cash. As the value decreases, lenders could be worried about their collateral. This vicious circle can end very quickly. China has not had to deal with financial crisis and we don't know how the government will react. The "smart money" won't wait for a crisis. They will reduce risk by selling into this rally. I believe we are already seeing that and that is why we don't have a runaway rally. Everything on the surface looks great. It is the undertow I'm worried about. We did not get the pullback I was looking for yesterday so I stayed on the sidelines. If the market breaks out to new all-time high, I will be a reluctant call buyer. I will keep my size very small and my stops will be tight. I can't aggressively get long until I see a nice dip. If the market rolls over and we trade below SPY $186.50, I buy puts. If we break support at SPY $185, I will add. At current levels, we are in no man's land. I will be day trading from the long side early this morning and I will be done after a couple of hours. This is a Quadruple Witch and the price action will be choppy. We've seen a series of reversals in the last 2 weeks and this is a low probability trading environment. Tread carefully and keep your size small. . .

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