Don’t Play the Grinch This Christmas – Trading Advice

December 21, 2021

Posted 9:30 AM ET – Stock valuations have not been this high since the tech bubble of 2000 and we are seeing selling pressure as the Fed moves closer to tightening. Look for choppy trading in this pre-holiday environment.

Key changes in the FOMC statement from previous months:

1. The Fed will be reducing asset purchases (tapering) at twice the rate that was reported at the last meeting.
2. Virus variants could weigh on economic growth and Real GDP growth was lowered .4% to 5.5% for 2021.
3. Median forecast by Fed officials is 3 rate hikes in 2022 and that is up from zero during the September FOMC. Tightening will happen much sooner than previously expected.
4. Median forecast for 2023 is 4 rate hikes and that is higher
5. Core PCE inflation projections are up by .7% to 4.4% in 2021 (their target is 2% and projections have been 2.5% earlier in the year).

Many countries are imposing travel restrictions and the virus is spreading rapidly. Domestic restrictions are likely to be imposed as well.

The $2T stimulus bill looks like it is dead in the water and that possible stimulus will not supporting the market.

Swing traders your long exposure should be limited to a handful of bullish put spreads. We did not get more aggressive because I have not liked the market back drop for a while. Manage those positions. We want the SPY to hold the 100-day MA and your stocks should hold the technical support levels that are above your short strike price. If the SPY and stock support levels fail, you need to buy back your spreads. There was not any incremental overnight news. The longer you can hold your bullish put spreads without stopping out, the better. Time decay will be working in your favor. I still believe the SPY 100-day MA will hold through year end and that was the premise for this strategy. Your greater concern will be with the stocks you have selected. Make sure they are holding the technical support you are leaning on.

Day traders, this is a tough trading environment. After a 60 point drop you would expect some decent price movement. We did not get that yesterday and the market instantly fell into a tight trading range. If we are going to see movement, it will come in the first 2 hours. The SPY is going to open right at a key resistance level near $460. After a heavy round of selling Monday, there is no reason to rush in and buy. I do NOT believe we will see a decent rally until support has been confirmed. That could come in the form of a market drop or a compression. If I see 3 consecutive long red candles stacked without any overlap (10% chance) I will favor the short side for the first two hours. A more likely retracement would come in the form of a choppy drift lower. If we fill in more than half of the gap, we are likely to fill it all in and you should favor the downside during that time. This scenario has about a 30% chance of happening. The most likely scenario (40%) is a compression that stays fairly close to the $460 level. If it lasts more than an hour it will confirm support and we can expect a gradual float higher. The S&P 500 tested the 100-day MA for the second time this month and that level has attracted buyers. I don’t plan on buying early. A gap and go is of no interest to me and a gradual drift up to $460 is likely to set up a short. We have seen heavy selling pressure in the last month during a bullish time of year. Those sellers will take advantage of the bounce this morning. That is why I don’t want to join an early rally.

Do you want to ruin your holiday spirit? If so, trade like mad this week so that you can lose money and play the Grinch. Do you want to enjoy your holiday? Hang on to your trading capital and try to find one or two good trades. Focus on how you are going to improve your patience and take your trading to the next level in 2022.

Support is at the 100-day MA and resistance is at $460.
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