Market Poised To Break Support Monday – Buy Puts. Start Today and Add Below SPY $185

March 20, 2014
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Posted 9:20 AM ET (Pre-Open) - Yesterday, the market braced itself for the FOMC statement and the new framework. The reaction was negative and traders were reminded that sooner or later interest rates will move higher. During the question-and-answer session, Janet Yellen said that the Fed would continue tapering and that they would keep rates low for an extended period of time. When she was asked to define "extended period of time", she said six months. That means rates will move higher a year from now. Most analysts already had that timeline in mind and this should not have been a major shock. I believe the market was looking for a reason to sell off. I see a technical pattern setting up. In December, the market broke through resistance and it established a new high. We saw a series of small reversals and they were a sign of exhaustion. Stocks were able to tread water and eventually the SPY challenged the high in January. That move lured in bullish speculators. The market was not able to breakout and the next wave of selling sent us all the way down to the 100-day moving average. We made a new relative high in March and we've seen a series of sharp reversals in the last two weeks. Monday's relief rally and Tuesday's follow through challenged that high. We saw a heavy round of selling yesterday and this pattern looks poised to repeat. I thought the FOMC would generate a negative reaction and I've been pointing to the flash PMI's as the real spoiler. They will be released Monday and China will be the focal point. Economic growth in China has been slipping. The government said that they will quickly start new projects. That will increase activity, but will it be enough? This morning, Goldman Sachs lowered their projection for Q1 GDP in China to 6%. If this holds true, global markets will decline. That is a huge drop from the current 7.5% level. As economic conditions deteriorate, financial institutions will feel the squeeze. Half of the lenders are unregulated (shadow banking) and they are highly leveraged. These loans are often secured by copper. This is a dangerous situation. Copper has been tanking. That means the value of the collateral is dropping. Some of these financial institutions might be selling to raise cash. Without question, China is the biggest dark cloud at this time. Individually, these defaults might be small. However, the trend is a warning sign and traders saw this movie five years ago. The "smart money" will adjust well in advance of a credit crisis. Economic growth in the US and in Europe is stable and improving. Corporate profits are strong and cash flows are at record levels. When strong opposing forces collide, trading conditions become volatile. I don't know if this five-year rally is over, but the conditions are very temperamental. Option implied volatilities are off of their lows and they have maintained this higher level. By historical measures, they are still very low, but we might be seeing a trend higher. That means Asset Managers are hedging risk. I will not buy calls until I see a substantial wave of selling. Bullish speculators need to be flushed out. I successfully day traded from the short side yesterday and I locked in nice profits. I mentioned a negative reaction to the FOMC was likely and I hope you caught some of that move. I will by puts ahead of the flash PMI's on Monday. If the market makes a new low for the day after a few hours of trading, I will buy some puts. I will add if the SPY closes below $185. Should that support level fail, we could hit an air pocket. This is a quadruple which and you can expect choppy trading. Make sure that exit long positions. Be patient and look for an opportunity to buy puts. You will be trading against a five-year rally so keep your size small. . . image

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