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Take Profits On Half of Your Puts - Ride the Rest

Posted by Pete Stolcers on August 5

Posted 9:30 AM ET – The market was pricing in best case scenarios and most of them didn’t pan out. Bullish speculators are getting flushed out and the S&P 500 will test the 100-day moving average this morning.

Two weeks ago traders rejoiced when Trump and Xi met at the G20 in Japan. After the meeting, trade negotiations resumed by telephone – a clearly bearish sign (not worth getting in a plane).

The market has priced in two more rate cuts this year and based on comments from Fed Chairman Powell last week that is not likely. Domestic economic conditions are solid, China’s economy improved slightly and the stock market is at record highs. The Fed has plenty of breathing room.

Earnings season has been good, but the strongest companies have reported. At a forward P/E of 17 stock valuations were at the upper end of their range. When Netflix, FB, AMZN, INTC and AAPL retreated after earnings a warning shot was fired.

A hard landing for England looks very possible. This news is not having a dramatic impact currently, but it is a dark cloud.

Of course you knew about all of these issues because I have been reporting about it for weeks. Swing traders are short the SPY. I am not overly bearish and I feel that this drop will ultimately result in a nice buying opportunity (not for weeks). Take profits on half of your short position on the open. The price action is going to slow down dramatically in the next few weeks. It is possible that that the SPY will test the 200-day moving average in the next few weeks.

Gradual rallies attract buyers and they can’t resist temptation when the market is consistently making new all-time highs (they are reminded daily by major media… and Trump). The “big hurt” comes quickly and the door will be slammed this morning. Instead of making money on short positions they will be trying to mitigate losses on their long positions. We will hold onto the second half of the position until I see a capitulation low. This could take days if not weeks.

Day traders should be cautious on the open. Let the early price action play out. We are likely to bounce off of the 100-day moving average and it will be tested again throughout the week. I plan to short the rips and take profits the dips this week.

Once this wave of selling plays out the market will find support and it will compress. Trading volume will decline in the next few weeks as we enter a news vacuum.
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