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Market Bounce This Week Will Provide Clues On Longer Term Direction [Watch For This]

Posted by Pete Stolcers on September 9

Posted 9:30 AM ET – Yesterday the market tested the low from Friday and support held during the day. I believe that buyers will be a little more confident and we are seeing a 30 point rally in the S&P 500 this morning. The market is likely to bounce and the next two weeks will reveal the next big move. The most likely scenarios are outlined below.

If buyers come back in force this week and we see consecutive long green candles closing on their high with late day strength the market will challenge the all-time high in the next few weeks. I believe there is only a 20% chance of this scenario playing out.

Buyers will still be passive and the magnitude and duration of this bounce will help us gauge the selling pressure. If the bounce only lasts a couple of days the market will test the low from yesterday next week. If support at SPY $333 fails easily we will test the 100-day moving average. I believe this scenario has a 30% chance of playing out.

I believe there is a 50% chance that this bounce will unfold gradually (5 to 7 days) and then we will retest the lows from yesterday. The move lower will be gradual and we won’t spend more than a couple of days at SPY $333. Buyers will regain confidence and we could challenge the all-time high late in October. This scenario will provide us with an excellent opportunity to sell out of the money bullish put spreads

The strong rally that we saw from the March low indicates heavy buying pressure. We barely saw any dips along the way and the June pullback came when the market rally was overextended. The dip lasted 3 to 4 weeks and I believe we will see the same this time around. I have not addressed fundamentals and the most likely scenario is based on improving economic activity and a reduction in new Coronavirus cases.

Swing traders should very passively sell a couple of bullish put spreads now. The price action I’ve referenced above will tell us which strategies to use and how aggressively we should trade. It will take a couple of weeks before we know. Tonight I will record my Weekly Swing Trading Video and I plan to highlight two bullish put spreads. In the scenarios I have outlined there is a 70% chance that the lows from yesterday will hold. We will stay inside of a three week time horizon and we will focus on stocks that have relative strength, heavy volume and substantial technical support that we can lean on.

Day traders should wait for early support today. If the low from the first hour stays above $335, I will be buying stocks with heavy volume and relative strength (Heavy Buying search in Option Stalker). The fact that sellers were not able to push the market lower tells me that there is support at SPY $333. I viewed yesterday’s price action is a small victory for bulls. Resistance is at $338. If the market moves through that level, it will start to fill in the gap from yesterday. If we close above $338 and there is late day strength, I will hold a handful of long positions overnight. We got the drop we were expecting and now we should see a bounce. As I mentioned earlier, the magnitude and duration of the bounce will help us gauge profit-taking. The next two weeks will give us the information we need and we will evaluate the price action day-to-day.

SPY $333 is support and $338 is resistance.
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