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Market Likely To Test All-time High - The Headwinds Are Blowing

Posted by Pete Stolcers on August 13

Posted 9:30 AM ET – Tuesday the market showed some vulnerability to profit-taking and the early gap higher was reversed. That price action resulted in a bearish engulfing pattern. Buyers stepped in yesterday and the S&P 500 rallied all day, closing 15 points from the all-time high. The high from February will act as a magnet, but resistance is building and tiny bodied candles reflect that. The move higher has come on light volume and these gains can’t easily be stripped away. This is a very light news cycle and I believe that the upside rewards are smaller than the downside risks.

Jobs are the key to this economic recovery and initial jobless claims fell below 1 million for the first time since March (963,000). Coronavirus growth rates in much of the country are flattening out, but many states are still in Phase 3. This means the economic recovery will be sluggish. Without a stimulus plan small businesses could be forced to lay off workers.

Politicians care more about recess than they do about helping Americans. There have not been any serious meetings this week and a stimulus bill before Labor Day looks unlikely. If President Trump did not use his executive powers to extend federal unemployment benefits, the S&P 500 would be significantly lower. The market is addicted to money printing and this drop could still happen.

Earnings season is over and profits were down 33%. Investors are expecting a speedy economic recovery in Q3 and that is not happening. Stock valuations are stretched and they need to grow into their current price levels. It’s possible that the market treads water at this level for the rest of the year, but a heavy dose of profit-taking is also possible.

The economic news will be very light. Retail sales will be released Friday.

We will be in a “news vacuum” through Labor Day and that favors the current momentum. Trading volume will drop off dramatically and intraday ranges will compress.

Swing traders who can’t watch the market during the day should be in cash. Selling out of the money bullish put spreads is dangerous because option implied volatilities have collapsed. You will be selling close to the money to get a decent credit and any market drop will instantly put these spreads in jeopardy. Last night I recorded my Weekly Swing Trading Video and I posted two new trades. After an exhaustive search I was able to find a couple of trades that should perform well even if the market dips. We have been in cash the last two weeks for the first time since February and that is the best place to be.

If you are trading during the day you can try to capture the last leg of this rally intraday. Even then, you have to be cautious because the price action is choppy. As long as the SPY is above $335, focus on the long side. Wait for dips and look for stocks with relative strength as the market pulls back. Once support is established, buy these stocks and ride them higher until the 1OP indicator spikes. I also suggest trading stocks that look good technically on a daily chart. This will give you added staying power and you will be able to ride out some of the chop. I’m trading 1/2 of my normal size in the morning and 1/4 of my normal size in the afternoon. Most traders have a very hard time throttling back their activity. If you are “leaking oil” each day, stop trading. This is a low probability trading environment.

Look for a test of the all-time high in the next few days. Keep it small.
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