Profit Taking Will Flush Bullish Specs Out – This Should Be the Last Wave of Selling

September 23, 2013
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Last week the Fed filled the punch bowl. Traders were expecting a $10 billion taper and it has been postponed. Stocks shot to a new all-time high and they hit resistance.

This “no-action” scenario was very unlikely and in my comments Wednesday I assigned a 5% probability of it happening. I mentioned that I would short the rally if it happened. Thursday, I reiterated that game plan. I have been selling stocks short on an intraday basis. My longer-term forecast is bullish so I want to keep overnight risk at a minimum.

I mentioned Friday, that if the SPY was trading below $171, I would buy puts. I have a relatively small put position (10%) and I don’t plan on adding.

The downside will be tested this morning. Profit taking has set in and bullish speculators that bought the breakout are now getting flushed out. If the selling continues and we make a new low after a few hours of trading, the market will drift down and test the 100-day moving average (SPY $166) this week. This is the most likely scenario.

Asset Managers will not chase. The Fed will taper and debt ceiling banter will keep them sidelined for couple of weeks. This should be the final wave of selling.

It is important to remember that the Fed’s monetary policy is accommodative even after tapering begins. The consensus is that the policy change will take effect during December’s meeting. Janet Yellen is likely to become the next Fed Chairman and that could be announced this week. This is also bullish for the market.

The House voted to approve the debt ceiling extension if Obamacare is defunded. This will be rejected by the Senate this week and the battle lines will be drawn. The government will run out of money in a few weeks, but the Treasury always seems to find extra money. The drop dead date probably won’t be reached until November. The can always gets kicked down the road at the last minute and the market will discount the event until it is on our doorstep.

Global flash PMI’s came in better-than-expected and elections in Germany went well for Merkel. Both events are market friendly. The news is fairly light the rest of the week.

Earnings season is only a few weeks away. Cash flows are at record levels and corporations are using that money to buy back shares. Any uptick in demand will go straight to the bottom line.

I am day trading from the short side today. I have a handful of puts that are showing nice gains and I don’t plan to add. I believe this is the last wave of selling and I will be scaling out as we drift lower.

The quarter ends next week and seasonal weakness is winding down. The bid should strengthen and I want to focus on getting long.

Day traders can short the market today. Swing traders, be patient and wait for this wave of selling to run its course. An excellent buying opportunity will present itself once support is established.
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