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Market Will Find Support - Wait For the Dip and Buy the Bounce

Posted by Pete Stolcers on August 11

Posted 9:30 AM ET – Yesterday the market breached a support level at SPY $246. That was a key level and it failed early in the day. Profit-taking set in and buyers pulled their bids. Bullish speculators hit the exits and the S&P 500 closed on its low of the day. There will be aftershocks for a few more days, but the market will find its footing.

If you look at a chart of the S&P 500 during the last year these nasty one day events play out quickly. Prices stabilize and the market rebounds. I am expecting a similar pattern. It is still too early for a sustained round of profit-taking.

North Korea is grabbing the headlines and the media has something other than Russian election collusion to cover. They are beating this new headline to death. There will not be a conflict and this is all saber rattling.

I’m not downplaying the significance of what’s happening. This is will be a widespread and problem in a couple of years. North Korea shares its nuclear research with Iran and Iran has money. Obama lifted economic sanctions and filled their coffers with $50 billion. Iran has been flexing its muscles ever since the agreement was signed. Both will sell nuclear weapons to other enemies of the free world.

The good news is that we don’t have to worry about that today. From a trading standpoint I believe this market decline will play out quickly. Stocks will rebound and they will hit resistance.

The next wave of selling should begin after Labor Day. The next FOMC meeting will be upon us and DC will only have a few weeks to raise the debt ceiling.

Swing traders should wait a couple of weeks. This price action is “noisy”. Aggressive swing traders should wait for the market to test the lows from yesterday. If support holds you can sell a few out of the money bullish put spreads. Major market support is only 30 S&P 500 points away (SPY $240.80 is the 100-day MA).

Day traders should expect a wave of selling in the first hour of trading. Profit takers will gauge the strength of the bid. If the market recovers quickly you can trade from the long side with confidence. If the market drifts lower and a new low is established after two hours of trading, stay sidelined. In this scenario we could challenge the 100-day moving average and you need to favor the short side.

I believe the most likely scenario is an early probe and a quick bounce. Stocks will gradually recover over the next few days and the action will stall.

Remember that investors always get nervous when the Fed and politicians are in recess.

Resistance is at SPY $245.
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