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Buy SPY Puts If This Scenario Plays Out Today!

Posted by Pete Stolcers on January 14

Posted 9:30 AM ET – Earnings season has officially started this morning. Citigroup missed revenues and the stock is down .7%. Chase and Wells Fargo will report tomorrow. Buyers have been nibbling ahead of earnings releases and the market has bounced the last two weeks. Trading volume is declining and this bounce feels tired.

Traders don’t want promises, they want clarity. Earnings season will clear some of the smoke and there is nothing like record profits to calm investor nerves. At a forward P/E of 14.5, stocks are reasonably priced. Preannouncement warnings and guidance for Q1 will determine where we go next.

Trade negotiations with China seemed to go well and the talks were extended an extra day. Both sides have hinted that the next round of negotiations will take place in Washington later this month. That would be a positive sign.

Global economic conditions are slipping and even if a trade agreement is reached, it won’t stop this downward cycle. China’s exports are down 4.4% from a year ago and imports unexpectedly dropped 7.6%. Its trade surplus with the US was up 17% and this is due to “frontloading”. Buyers purchased Chinese goods before proposed tariffs could go into effect and that inventory needs to be worked off. I believe that China’s numbers will drop quickly in coming months. Five rounds of easing from the PBOC in the last year have not stopped the bleeding.

Economic growth in Europe and Japan is also soft.

Theresa May will make a speech today and if Brexit is rejected tomorrow she feels that it won’t happen at all. That would avoid a “no deal” disaster. This is a small dark cloud because it casts uncertainty on a large economy.

The Fed has been relentless and they are finally starting to soften their tone. However, Powell still plans to substantially reduce the Fed’s balance sheet. We will get more Fed speak this week (Tues). Given the global backdrop, many analysts believe that the Fed has been too aggressive.

Swing traders are in cash, but we will take a short position if this scenario plays out. The market has been trending higher and we have seen a bullish pattern of lower opens and higher closes. Once support is established this morning the market will bounce. If that bounce fails we will see continued selling. After one hour of trading if the SPY is above $256.50, short the SPY if it trades below $256. We will use a wide intraday stop of $260. The plan is to fade the bounce this morning when we break horizontal support. If the bottom falls out of the market right from the open, we won’t take action. If the market bounces and continues to grind higher, we won’t take any action. The only way we will trade today is if we get an early bounce and a trade below our entry point.

Day traders should look for an opportunity to buy once support is established. The pattern of lower opens and higher closes has been strong and it is bullish. I don’t believe we will see a decent round of selling until the upside is tested. This bounce is about the only move I am confident in. After that we could go either way. Use the entry points mentioned for swing trading to short the market. Use the first hour range as your guide. Trading volume has declined and you should expect choppy trading. Earnings season will boost the volume during the next few weeks.
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