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Buy More Puts If This Happens Today - Bearish Price Action

Posted by Pete Stolcers on February 8

Posted 9:30 AM ET – Yesterday we saw the first signs of weakness and the S&P 500 blew through support at the 100-day moving average. The news was not that daunting and this suggests a heavy dose of profit-taking. Swing traders shorted the SPY when it breach $270 and we will add the other leg today if conditions warrant.

Trump will not meet with Xi at the end of the month. We don’t know why, but this is probably a negotiating tactic. Trump feels he has the upper hand and this could mean that both sides are so far apart that a meeting is pointless. Trump’s economic advisor (Kudlow) said that both sides are still far apart. Meanwhile, China’s economy continues to slip despite aggressive easing by the PBOC.

Global economic conditions continue to deteriorate. Germany’s industrial output and retail sales tanked. Italy is in a recession and uncertainty surrounds Brexit. Theresa May is trying to renegotiate the Irish border in Brussels and the EU is not budging. This could mean a hard exit.

Congress needed to vote on a bill that includes border security today or risk missing the deadline next week. Politicians continue to drag their feet and another government shutdown is possible. This one will have an impact on economic growth. Trump will reallocate appropriated (and I used) funds to build the wall/fence and he is steadfast.

Earnings season has been excellent and mega cap tech stocks have reported. Those companies typically spark optimism and shorts are cautious ahead of those releases. Now that they are behind us, sellers will be more aggressive.

The Fed monitors the market (no matter what they say). They want to tighten and they will do so when market conditions allow them to. Two rate hikes are projected this year and the market is not pricing in any rate hikes.

Major moving averages provide key support/resistance levels. The price action around those levels indicates market strength/weakness. The S&P 500 never got to the 200-day MA before turning back (bearish). Yesterday’s drop through the 100-day MA came very easily and that is a bearish sign.

Swing traders are short the SPY at $270. We will lower our stop on a closing basis to $274. If the market is trading below $270 after one hour of trading we will short the second half of our position. You know from my comments the last few weeks that I’ve been waiting for this bounce to run out of steam. The selling pressure is increasing and I believe the next big move is down.

Day traders should use SPY $270 as a guide. I don’t know if the market will bounce right out of the gate or go right into a decline. Stocks will NOT move higher until the bid has been thoroughly tested. I will be looking for an early opportunity to short. On the drop I will be looking for support. If the selling pressure remains constant and we make new intraday lows I will favor the downside. If the market is able to rally back above $270 I will favor the long side.

Support is at $268.40 (low from Thursday) and resistance is at $270 (100-day MA).
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