Profit Taking Will Test the Breakout At SPY $173. Bullish Specs Are Getting Flushed Out.

October 23, 2013

Webinar tonight. I will give you my market forecast and we will find some nice trades using the Scanner. Register on the right.

Yesterday, the market surged to a new high and we started to see some profit taking. The SPY has jumped 8% in two weeks and a melt up was the greatest risk for this rally. Once we dropped below SPY $175, I took some profits and I bought protective puts. The market did not close below that level yesterday, but it will test it today.

I will post yesterday’s chart again today. You can see that the last few breakouts to a new all-time high have resulted in profit-taking. Asset Managers will not chase, but they will buy dips. Bullish speculators will get flushed out and that will present a buying opportunity.

Yesterday, Netflix surged to a new all-time high and it reversed sharply. Carl Icahn made a killing and he sold half of his position. This could lead to profit-taking in other “hot” stocks.

Cyclical stocks are starting to catch a bid and they need to lead the next leg of this rally. GE, PH, WHR, FCX, BHP and BA all look strong. CAT is the outlier this morning.

Flash PMI’s will be released tomorrow and the news should be market friendly. Economic conditions are improving in China and Europe.

The Fed will remain accommodative through 2013. They won’t taper until Janet Yellen takes office and the debt ceiling is extended one year. Republicans have been humbled and the next round of negotiations won’t be as bumpy.

All of the pieces are in place for a nice year-end rally. The market got ahead of itself and we will see a little profit taking. Dips will be brief and shallow. This pullback should find support at SPY $173.

I suggest taking profits on at least half of your long positions this morning. This has been an incredible run in the last two weeks and it would be foolish not to take some risk off of the table. If the SPY closes below $173, I would get out of all long positions. That breakout needs to hold.

If the market makes a new intraday low after two hours of trading, it will drift lower all day. I will day trade from the short side if I see that happening.

Ultimately, we want to buy any dip and I’m hoping we see $173. I am still expecting a nice year-end rally.

If the market surprises me and it continues to push higher, I will buy if the SPY closes above $176. My size will be relatively small and I will buy calls to limit my downside.

The wave we have been riding might be ending. Take a break and get ready for the next one.
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