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Market Is Vulnerable To Profit Taking - Resistance Is Building - Use Caution

Posted by Pete Stolcers on January 11

Posted9:30 AM ET – Friday the market gapped higher and it made a new high right out of the gate. I warned you not to buy that move and I explained why. Resistance is building and traders who chase this rally will regret it. The market gave back those gains and drifted lower for the first half of the trading session. Late in the day buyers emerged after support was established and that was an excellent entry point for longs. This morning the bid will be tested again on the open and the S&P 500 is down more than 30 points overnight.

Last Friday’s comments were extensive and I outlined how I am day trading and swing trading the current market. I still believe that there is upside as we head into earnings season, but resistance will be fairly stiff when the market gaps higher.

The buying pressure is still fairly strong and the S&P 500 has poked through the upper end of a trading channel. That typically leads to a buying climax in a week or so.

The backdrop seems particularly vulnerable to me. Valuations are extremely stretched, job losses are on the rise, bullish sentiment is extremely high, margin borrowing on a dollar basis is at record levels, option implied volatilities are extremely low, new Coronavirus cases are rising, there is a new virus variant, and analysts don’t believe that the vaccines will have a material impact until May. From my perspective, surprise favors the downside.

Another $500 billion in stimulus is keeping buyers engaged. Biden promised that the $2000 checks would happen if they won both Senate seats in Georgia.

Earnings season is starting and that typically attracts buyers. Hot money is flowing into clean energy, crypto currencies, pot, human genome and electric cars. Many of the stocks have gone parabolic. At a P/E of 40, there are not any bargains.

Swing traders should sparingly sell out of the money bullish put spreads. Keep your risk exposure low and wait for a dip. Stock selection is critically important given that the market could rally and then reverse in the next 2 weeks. The strongest stocks will weather the storm and by selling out of the money bullish put spreads that expire in three weeks or less we are giving ourselves plenty of cushion and we are taking advantage of accelerated time premium decay. If the SPY breaks key technical support levels we will be ready to reduce risk and buy back some of our bullish put spreads. Until then, we should expect a move higher this week.

Day traders are getting lots of intraday volatility and sustained stock moves. This is a good environment for day trading. Gaps down provide us with important information. Stocks that want to move higher are easy to spot and we simply have to wait for support to be established. I believe that an early low will be established and that support at SPY $377 will hold today. I will be watching for consecutive long green candles the close on their high. When I see that I will know that buyers have returned. Stay fluid and use the 1OP indicator for the SPY on a five minute basis as your guide. Heavy Buying, Relative Strength 30 will be my go to searches right out of the gate this morning. If the market makes a new low after two hours of trading, favor the short side.

Support is at SPY $377 and resistance is at the all-time high.
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