Rally Is In the 9th Inning. Buy More Puts If the SPY Goes Negative Today. If Not – Scratch Put Trade

December 4, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

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We are starting to see some profit taking and bullish speculators will be flushed out in the next few days. After a 25% run, Asset Managers are not worried that they will miss a year-end rally. They won’t chase stocks at an all-time high and they will pull bids if the selling pressure intensifies.

Monday, I suggested trading from the short side. Stocks opened lower yesterday and we got the bounce I was looking for early in the morning. As forecasted, stocks retreated late in the day and we closed near the low.

The SPY tested first support at $180; if it fails we are likely to test $178. Today’s early decline was blamed on a better-than-expected ADP number (215,000 new jobs in the private sector). In theory, this might move the Fed’s tapering time table forward.

Don’t buy into this rationale. We need strong economic growth for the market to move higher and the Fed will not taper until Janet Yellen is an office and the debt ceiling has been extended.

The market was down before the ADP number. Global economic conditions are slipping. Europe is faltering and so are developing countries (Brazil and Australia).

This is simply a round of profit taking. High fliers are most vulnerable and we could see rotation into cyclicals once support is established.

I still think it is too early for the debt ceiling/continuing resolution/tapering/Obamacare to be weighing on the market. These storm clouds are still off in the distance.

The market probed for support this morning and it instantly bounced back. Volumes are fairly light and the price action is balanced. When the market dips, we see some buying. When the market rallies we see some profit taking.

This is the last round of major news for 2013 and it needs to result in a directional move one way or the other. If that does not happen, we could fall into a very tight trading range. Seasonal strength favors the upside and we could inch higher into year-end.

This rally is in the ninth inning and I am inclined to short stocks. I bought puts Monday and I added to positions yesterday. I have a small profit and I am ready to scratch these trades if I don’t see afternoon selling.

If the market grinds higher from here, I will not participate. I don’t want to chase stocks at this level, but I will buy a decent dip down to SPY $178 or lower.

My gut tells me that the rebound today is luring in bullish speculators. If we go negative the door will be slammed on their fingers and I will add to my put positions. My size is small and my exposure is limited.

To summarize, I am long puts and I am ready to scratch if this rally continues. If we reverse and go negative, I will add to put positions.
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