Day Trade From the Long Side Today. Swing Traders – Wait For the Air Pocket

October 8, 2013
Author: Peter Stolcers, Founder of OneOption

The market is chopping back and forth as the debt ceiling deadline approaches. Stocks rallied on Friday and all of those gains were stripped away yesterday. Both parties are digging their heels in and this game of “chicken” continues.

Republicans have the most to lose. Recent polls suggest that 70% of Americans disapprove of their tactic. Mainstream media is partially to blame. If the GOP continues to press the issue they could lose the House in 2014. It is very likely that they will settle for a minor concession. That might include the repeal of the medical device tax, a tax holiday for repatriation or minor entitlement restructure.

From a trading standpoint, the worst outcome would be a short term extension. The arguing would continue and credit agencies would lose confidence. Business investment would contract just as it did in August 2011.

Some analysts would argue that an actual default would be worse. From a credit standpoint they would be correct. From a trading standpoint, the market would plunge and it would set up a fantastic buying opportunity. The US would not go over the cliff for more than a day or two.

The economic releases are light this week because of the government shutdown. Wednesday afternoon the Fed minutes will be released. If the consensus was to remain accommodative because of economic conditions, the news would be bullish because the FOMC might postpone tapering until 2014. However, if the debt ceiling kept them from tapering, they might reduce bond purchases as soon as the debt ceiling is extended. This would be bearish for the market.

Earnings season kicks off today. Alcoa will not have much of an impact, but major banks will. They start releasing on Friday. Earnings estimates for banks have been lowered due to low trading volumes, a decrease in refis and higher legal expenses. The warnings are starting to increase and 90 of the S&P 500 companies have lowered guidance. This is a fairly high percentage.

This is a day trading environment and it does not make sense to hold overnight positions. If the market sells off, buy dips once support is established. Ideally, the market gaps down and it recovers the rest of the day. If the market opens higher and it continues to rally, trade half of the normal position. Do not chase.

This strategy will work as long as we have a week left before the deadline. As we draw closer, the risk increases. There will be a day when the market declines and we get the early bounce. That move will lure in bullish speculators. Unfortunately, that bounce will fail and the market will make a new intraday low. Bullish speculators will bail on positions and bids will be hard to find. That will mark the beginning of the “air pocket”.

If the debt ceiling is not extended, the market will send politicians a warning. Stocks will plunge and the SPY will drop below the 100-day moving average.

Global economic conditions are improving, credit risks are low and corporate cash flows are at record levels. A fantastic buying opportunity lies ahead and this giant dark cloud is the only thing stands between investors and a new all-time high.

Swing traders – be patient. That air pocket won’t last more than a day or two and you have to be ready to buy November calls. Today‚Äôs chart shows the long term strength of this trend.

Stocks sold off yesterday and we probed for support right on the open today. The market should be able to grind higher today. Maintain tight stops and exit all longs if the market makes a new low after a few hours of trading.

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