Posted 9:30 AM ET – Bull markets die hard and this one is showing signs of strain. If you look at a weekly chart of the S&P 500 you will notice two consecutive red bars. Take a look at the last 20 months and you can see that this is rare. Of greater importance is the fact that seasonal strength has not been able to offset the selling pressure.
Last week’s jobs report was dismal and the spread of the Omnicron variant could lead to further economic contraction as states impose new rules. Goldman Sachs lowered its GDP forecast because of it. The Fed is concerned about inflation and we know that from Powell’s testimony before Congress last week. He said that tapering is likely to happen much faster than expected pace.
Stock valuations have not been this rich since the tech bubble of 2000. Perfection is priced in and the back drop is NOT perfect.
China’s economic activity is contracting and its market is in bear territory (20% off of the high). Evergrande is inching closer to default and real estate developers are reporting tight credit conditions (a number of them are also on the ropes). Credit issues in the second largest economy in the world could cast a very wide shadow on all markets. China has been the global growth engine for the last two decades and I sense a great deal of “froth”.
Swing traders should be keeping long risk exposure to a minimum. At most, have a few nice bullish put spreads on. I would not add to bullish put spreads until support is established and retested. You may need to close those spreads down if the SPY does not find support at $452. If the market finishes below that support and the stock loses its relative strength and it is breaching support, close down the spread. Legging out is viable, but it requires the perfect set-up and I have a video on how to do it in Tutorials. If the market does not finish the year near the all-time high it will be a bearish omen for 2022. Time decay will be working in your favor and the stocks need to be evaluated on a case-by-case basis. The bottom line is to keep your overnight risk exposure very low. I do not like what I see.
Day traders should watch for a gap reversal today. Asian markets were weak and tech stocks have been sluggish this morning. I do NOT believe we will see a sustained rally this morning until the downside has been tested. I still prefer to trade futures on the short side and to trade stocks on the long side. This has been a tough market for swing traders, but an excellent market for day traders. Pick your entry points carefully and expect two-sided action.
Support is at the low from Friday and resistance is the high from Friday. This will likely be an “inside day”. If the volume is light and the candles are mixed in the first hour we can expect a boring day.