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Keep Reducing Risk and Lock In Profits - Risk/Reward Favors Cash

Posted by Pete Stolcers on July 16

Posted 9:30 AM ET – Yesterday the market tried to challenge horizontal resistance at SPY $323.40 and it is within striking distance of that level. Asian markets were weak overnight and the S&P 500 is down 20 points before the open. Use this opportunity to take profits and to reduce your risk exposure. I believe that the market is vulnerable to profit-taking in August.

The Coronavirus is spreading and many states are stuck in Phase 3. Major cities are considering a complete shutdown. This will dramatically lengthen the economic recovery and credit issues are likely to surface.

This morning retail sales came in at a robust 7.5% and that was better than the 5% growth that was expected.

China’s GDP grew 3.2% (2.5% expected) and industrial production was 4.8% (inline). Retail sales in China came in at 1.8% which is fairly low considering that they have a two month lead on the economic recovery. Decent economic numbers did not offset fears that another trade war with the US is brewing after Hong Kong lost its trade status. The Shanghai index was down 4.5%.

We can expect another helicopter drop from Congress before they go on recess in a few weeks.

A vaccine is critical, but it won’t be available for months (at best). We still have to endure many months of a dismal economic growth and there will be business failures. There are bond defaults in the energy sector. Bank of America posted earnings this morning and the company took a $4 billion bad loan write down. My biggest concern is that credit issues start to rise as the economic recovery is hampered by the spread of the Coronavirus.

Swing traders should keep it light. Last night I recorded my weekly swing trading video and the stocks we selected have a tendency to rally into earnings. All of them are posting in the next two weeks and we will keep our bullish put spreads inside of two weeks so that we can constantly monitor market conditions. If we are not filled on the spreads expiring July 24th by the end of the week we will cancel the orders. We are going to lean on this statistical edge and the Option Stalker “Buy Into Earnings” list will provide us with some excellent candidates. The market drop this morning might help us get filled on one or two of them. I do not want to load up on positions. Reduce your trade size in this low probability trading environment. We should still have a solid market bid for a week or two.

Day traders should wait for support this morning. Opening gaps lower have been our best scenario for day trading. I will be watching tech stocks on the open to see if they still have “gas in the tank”. Once support has been confirmed we can buy stocks with relative strength. We’ve seen an incredible amount of intraday volatility in a 100 S&P 500 trading range during the last week. It’s impossible for me to tell you how the day is going to play out before the open. We will use the 1OP indicator to time our longs and shorts.

Swing traders should use this opportunity to get to a cash position and to reduce risk during the next two weeks. Day traders should look for early opportunities. Reduce your trade count and your size. I will be trading half-size in the morning and quarter size in the afternoon. I still view this as a low probability trading environment.

Support is at SPY $319 and resistance is at $322.70 and $323.40.
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