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Short the SPY Below When It Goes Below This Level

Posted by Pete Stolcers on January 3

Posted 9:30 AM ET – Yesterday the market dropped on the open and that was the low of the day. Buyers stepped in on the first trading day of the year and they scooped stocks. A full-blown reversal was underway by mid-morning and the market rallied into positive territory. This is bullish price action and a base is forming. This process will take a few months after such a steep decline.

Apple warned overnight. This is the first time since 2007 that quarterly forecasts have been trimmed. iPhone sales in China were partly to blame and it accounts for 20% of sales. Revenue projections were reduced to $84 billion from a previous range of $89 billion-$93 billion. The stock is down 8% before the open and it will impact semi-conductors.

Earnings season is right around the corner. At a forward P/E of 14, stocks are relatively cheap. Oracle, FedEx and Micron recently posted and all of them reduced guidance. Bad news is priced into the market and we could see small bounces if results are “better than feared”. For those companies that miss, look out below.

ADP said that 271,000 new jobs are created in the private sector during the month of December. That is a gangbuster number and it is probably inflated by seasonal employment. It bodes well for the jobs report tomorrow. ISM manufacturing will be posted after the open and we want to see strong domestic growth.

Global growth is the bigger issue. China’s economy is slipping and manufacturing PMI’s are in contraction territory. This might prompt easing from the PBOC and there is talk of fiscal stimulus. Apple’s news suggests deteriorating consumer demand. Trade talks with the US will take place in the next few days and China might be more willing to negotiate now that economic growth is declining. China was not interested in doing anything before the November elections and hopefully the mood has changed.

Italy has a budget deal with the EU and Theresa May will take another stab at Brexit in the next few weeks.

The government shutdown continues and Trump is not budging. He wants voters to know exactly where he stands (national security) and where Democrats stand (open borders). Trump feels that most Americans side with him on this issue. Over 75% of the government is funded so the impact is minimal.

Bristol-Myers announced that they will buy Celgene. This news should put a bid under the biotech sector today.

Swing traders did not enter a position yesterday. If the SPY trades below $247 get short. We will use a fairly wide stop of $251 on a closing basis.

Day traders should let the early action unfold. I sense that Apple’s news will dampen spirits and we could see a nasty drop. If the market is below the first hour low, get more aggressive on the short side. The first hour range as your guide. Support is at $246 and $240 and resistance is at $250 and $251.

I’m expecting a volatile day because there is good news (Celgene and ADP) and bad news (Apple).
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