Market Is Vulnerable – Drop Very Possible – Watch This Key Level

December 14, 2021

Posted 9:45 AM ET – The market made a new all-time closing high and the rally last week was largely fueled by corporate buy backs ahead of tax reform. According to Bank of America that buyback window has closed and we saw a little profit taking yesterday. The FOMC statement tomorrow will have some Asset Managers on edge. A drop down to SPY $462.50 before the announcement would provide an opportunity to sell out of the money bullish put spreads.
Inflation has been running very hot and the PPI came in at a very hot .8%. The market shrugged off a very hot CPI last week, but the selling pressure was negated by corporate buybacks. We do not have that backstop today and the S&P is down 20 points before the open.
The Fed has stated that they plan to accelerate tapering and that could move the tightening timeline forward. If the Fed waits too long, their hand could be forced by the market and rates will start moving higher. As long as TLT is trading above $141 I would not worry too much about Fed tightening.
Swing traders should manage their out of the money bullish put spreads. If they are trading for pennies, take gains and wait for an opportunity to reload. If we get the market drop you need to have your bullish swing trades ready. Don’t go overboard and do not have too much tech exposure. That sector will take heat if bonds fall (interest rates rise). Strong stocks that have recently broken through resistance on heavy volume and that are able to maintain that breakout during the market dip would be prime candidates. I consider this a low probability environment, but I believe that SPY $452 will hold into year end and we could see a little strength after the FOMC statement. The Fed will accelerate tapering, but they are very reluctant to tighten and that is much more important to investors.
Day traders should look for an opportunity to short early today. The market will test the low from a week ago (SPY $464) and this support level is VERY vulnerable. There are multiple touches for horizontal support and this tells me that a breach would trap a lot of traders. The best set-up for us is an instant knee-jerk bounce. This is the most likely scenario since traders bought after the CPI last week. Realize that that bounce was supported by corporate buy backs. Once that bounce runs out of steam there will be an excellent shorting opportunity. If we are able to take out SPY $464, sell stops will trigger and the gap down to SPY $460 will fill. Again, this would be the most attractive scenario from a trading standpoint. This is a quad witch and that should spark a big move this week. If the market flounders around with support holding and lots of mixed candles – keep it light and expect a dull day ahead of the Fed.
Support is at SPY $464.30 and $466. Resistance is at $470.
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