Biggest Market Threat Is Profit Taking This Week – Look For Choppy Price Action On Light Volume

November 25, 2013

Last week, the market drifted higher on light volume. There are not any spoilers or catalysts on the calendar and momentum/seasonal strength are pushing stocks higher.

Earnings season is almost over, the economic calendar is light and the week is divided by a holiday. Trading volumes will decline with each passing day.

The debt ceiling, the continuing resolution, tapering and the impacts from Obamacare won’t be an issue for a few weeks. As 2014 approaches, the headwinds will build.

The recent rally leaves us vulnerable to profit taking. After a 25% run this year, I doubt Asset Managers are worried that they will miss a year-end rally. We’ve seen a couple of sharp reversals off of new relative highs and that is a warning sign.

If Asset Managers decide to lock in profits this week, the bid will falter. Bullish speculators will try to exit and we could hit a small air pocket.

In the last five years, the price action has been strong on Monday and weak on Tuesday and Friday. Don’t get lulled into this rally. Take profits on bullish positions along the way.

Revenues could be decent on Black Friday, but margins will suffer. The discounting will be deep and store hours have been lengthened.

Next week, the economic news will crank up and the volume will return.

I have been selling out of the money put credit spreads. I am able to distance myself from the action and I don’t have to sweat every wiggle and jiggle. I want to be able to step away from the market this week when the action dries up. This strategy also takes advantage of the strong market bid and time decay.

Keep your size small and know that the biggest threat to this rally is profit taking. Set targets and scale out of long positions. The price action will be choppy the rest of the week and if we pullback, you will have a chance to reenter at a better price.

Be prudent.
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