Watch SPY 85 – If We Break Below – Retest Of Lows!

Yesterday, the market continued its one-week slide. The breakout above SPY 92 failed last week and Monday we broke below the uptrend line that dates back to November. Volume has been picking up during the decline and the VIX is rising. Banking stocks are sliding and traders will error on the side of caution ahead of earnings next week. The street suspects that additional TARP capital will be plowed into financial institutions. Next week, we will be able to assess damage. President-elect Obama has requested the remaining $350 billion of TARP funds. He does not want to take office "unarmed". If another crisis unfolds, he wants to be ready. Congress has to release the funds and that is a two-week process. His advisers might be warning him that massive bank write-offs lie ahead. Credit markets continue to ease and the appetite for risk is gradually coming back. Over $9 trillion sits on the sidelines waiting for signs of improvement. These two factors are helping the market as it treads water. On the negative side of the ledger, the list is much longer. Massive debt levels and unemployment will weigh on the market for many months to come. In today's chart you can see the choppy action from SPY 85 - 92. As soon as a rally gains some momentum, it fails. The same is true on the downside. We are near the bottom end of the trading range and I believe it will hold. The only land mine this week is the initial jobless claims number. It's possible that it will be much weaker than expected. During the holiday, unemployed workers could have postponed their applications. That means that many claims will be processed this week. If the SPY breaks below 85, option expiration sell programs could kick in. Given the back-and-forth action within the range, the market is likely to find support at least until the inauguration. Optimism surrounds the President-elect. Unfortunately, his honeymoon will be short. Earnings guidance has been weak so far (AA, CSX), but the stocks have held up after the announcement. We will see if that trend continues next week. Earnings season will take some of the focus off of unemployment and the guidance will be scrutinized. The only trade I like at this stage is to sell out of the money puts in the energy sector. The premiums are rich and oil will find support near its current level. This is a time to keep your risk exposure small.

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