Day Traders – Buy Dips On An Early Low This Week. Swing Traders – Air Pocket Still Likely Be Patient

October 7, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

The S&P 500 is down 15 points before the open. This is exactly why I am not taking any overnight positions. All of Friday’s gains have been erased.

In my comments last week I mentioned that I would be getting long HMOs and I would be trading half of my normal size because I was buying into strength. I was able to catch most of that move and I took profits.

I will day trade dips from the long side once support is established. As long as we have a week or more until the deadline, I will trade my normal size. Asset Managers will try to get long ahead of a year-end rally and they will support the market.

As we get closer to the deadline, this day trading strategy becomes risky. Speculators will expect every dip to reverse and they will get “sucked in”. The market won’t recover and a deep decline will send politicians a warning sign. Bullish speculators will bail out of long positions and Asset Managers will pull bids. There will be a little panic and that is when we will test the 100-day moving average.

Politicians will see the nasty decline and they will be forced to negotiate. We’ve seen this pattern in August 2011 and December 2012. Last week, President Obama said that the market should be worried. I have every reason to think that DC will take us to the edge.

Over the weekend, Speaker of the House John Boehner told ABC that he will not hold a vote to pass a “clean CR”/debt ceiling until Democrats negotiate. The White House said it will not negotiate until the debt ceiling is extended. This “game of chicken” will continue.

The market has not priced in a credit downgrade. No one is talking about it and although slim, the possibility exists.

There won’t be many economic releases this week because of the government shutdown. The FOMC minutes will be released on Wednesday. We might learn that the taper was postponed because of the debt ceiling. That means the Fed will taper as soon as the debt ceiling is extended and this could weigh on the market.

Earnings season kicks off Tuesday. Banks will release Friday and earnings estimates have been lowered. Trading volumes are down, legal expenses are up and mortgage refis have decreased. The earnings will be decent, but the initial reaction could weigh on the market.

My trading strategy is basic. I am very bullish and if history repeats itself we will hit an air pocket. When we drop below the 100-day moving average I will be ready to buy November calls. If we never get the decline and DC pulls a rabbit out of its hat, I will buy November calls when the debt ceiling is extended. This is a huge dark cloud and it is the last one we have to navigate.

The most difficult scenario would be a six-week debt ceiling extension. That would mean that we muddle around into year-end.

This week I will continue to buy dips once the support is established. I will not hold any overnight positions. Look for early lows and a gradual grind higher. This is the type price action we want to see. Beware of declines where a new intraday low is made after a few hours of trading. This pattern will signal that we are close to an air pocket and you should exit your longs if that happens.

Next week, I will sit on the sidelines and I believe we could hit air pocket if the rhetoric remains ugly.

Swing traders, be patient. This will all play out in another week and you will have an excellent buying opportunity.
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