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Big Market Drop Is A Warning Sign - Don’t Buy the Bounce - We Need A Retest

Posted by Pete Stolcers on June 12

Posted 9:30 AM ET – Yesterday the S&P 500 tanked on fears that the Coronavirus was spreading again and that it would impede the economic recovery. The selling pressure was steady all day and every bid was slapped down. There weren’t any bounces during the day and the S&P 500 closed on its low. This morning, we are seeing a fairly big bounce before the open on news that President Trump will not close the country again.

Social distancing and face masks seem to be effective in controlling the spread of the virus. I believe that this new spike could impact consumer behavior and the recovery could take longer as consumers gradually resume their normal lifestyles.

Bullish speculation was as high as we’ve seen it in two decades and that “fluff” had to be taken out. Once profit taking set in, sell programs were triggered and bullish speculators hit the exits. I still believe that the bid will be tested in the next week. Major support at SPY $300 should hold and this will set up an excellent opportunity for us to sell a out of the money bullish put spreads. We need to wait for a retest of support.

Swing traders should remain on the sidelines. We have two bullish put spreads that will expire today and we have one bullish put spread that will expire next week. Our risk exposure is minimal and we are in cash. Instead of managing losing positions, we will be evaluating market pullbacks and looking for new opportunities. In this week’s video I listed 4 stocks that I believe will do very well. Netflix held strong yesterday and I consider it to be a flight to safety stock. Even if the virus spreads, people will still watch movies at home. I like selling the NFLX June (26) $400/$395 bullish put spread for a one dollar credit and I would use a close below $400 as a stop. We will be looking for new bullish put spreads next week and I will focus on mega cap tech stocks.

Day traders should be cautious on the open. After heavy round of selling yesterday, I believe that the bid will be tested early this morning. Wait for support to be confirmed and then buy stocks with relative strength. After the first two hours of trading we will get a feel for the action. If the market makes a new low for the day after two hours of trading, focus on the short side. If the market makes a new high for the day after two hours of trading, focus on the long side. We should see buy/sell programs and once the momentum is established is likely to continue in that direction.

I expect to see sideways market movement during the next month and that two-sided activity will present opportunities on both sides. The market needs to spend some time in a trading range while it waits for clarity.
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