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Strong Market Support and Resistance - Keep It Small - Dog Days of Summer

Posted by Pete Stolcers on July 9

Posted 9:30 AM ET – The S&P 500 is in a holding pattern. Earnings season is approaching and buyers will remain engaged ahead of mega cap tech announcements. The number of new Coronavirus cases continues to accelerate and that will keep a lid on the rally. We are in a news vacuum and we can expect tight intraday ranges with a slight upward bias for the next two weeks.

Big banks will report next week and the results should be fairly weak. We can expect write-downs and cautious guidance in a 0% interest rate environment. Financial stocks have lagged the market rally and I don’t expect them to move much. Investors will remain focused on tech earnings and they are still two weeks away.

The number of new Coronavirus cases hit a single day record (60,000) yesterday. The number of states that are still in Phase 3 account for 40% of domestic GDP and this is a side that the economic recovery will take much longer than we had hoped. Consumers will be cautious and more fiscal stimulus will be needed. Congress is likely to pass a bill before they go on recess in August. The supplemental $600 per week provided by the PPP will expire on August 8th for those who collect unemployment benefits. Republicans want to cut another $1200/taxpayer check and Democrats want to extend the PPP. Either way, you can expect more money printing.

The economic releases have been good. ADP, ISM manufacturing, the Unemployment Report and ISM services all came in better-than-expected.

I believe that the market could grind its way higher in July. As we get further into August, the selling pressure will build and the market will be vulnerable to a pullback.

Swing traders should keep their risk exposure light. Last night I recorded my Weekly Swing Trading Video and I highlighted six new bullish put spreads. These are all stocks that have relative strength and that are above major technical support levels. We are selling out of the money bullish put spreads that expire on July 24th and we want to take advantage of accelerated time premium decay. The market bid should remain strong and that will increase our odds of success. We will need a small market dip and/or a dip in the stock to get filled on our spreads. We are not going to chase stocks, we need to get filled on our own terms and a good entry is important. We might only get filled on a couple of the spreads and that is why I provided so many new picks. Given my short-term bullish bias and my longer-term bearish bias – this is a time to be cautious.

Day traders should reduce their trade count and trade size. This is a low probability trading environment and we are in the dog days of summer. The price action has been choppy and this is likely to continue. I am trading half of my normal size in the mornings and I am trading 1/4 of my normal size in the afternoons. By staying engaged I’m able to evaluate price movement and monitor conditions. I’m in a defensive mode and it’s more important not to lose money than it is to make money. Use the first hour range as your guide. If we are above it, favor the long side. If we are below it, favor the short side. If we are inside of the first hour range after two hours of trading you can expect that range to hold. When the market is at the lower end of the range, look for strong stocks and try to scalp the bounce (buy stocks with relative strength). If the market is able to break out from the prior day’s range there is a chance that we will see a trend day and you can join that trend.

Support is at SPY $313 and $312. Resistance is at $317.50
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