Swing Traders Stay In Cash – Day Traders Jump On Rotation

Posted 9:30 AM ET - There is not any incremental overnight news. The S&P 500 is down 30 points before the open. The best strategy for swing traders is to patiently wait for a market pullback. We are still seeing brisk sector rotation and basic materials stocks have been hammered this week. Economic growth will be hampered by shortages. One example is cargo boxes. The price has gone up from $1650 to $11196 and shipping containers that were loaded are being unloaded because a buyer is willing to pay more. Hasbro and Mattel are sitting on stock piles of toys in China and it is doubtful they will reach the US in time for Christmas. Again, this is one small example of a larger problem and it helps to explain why China’s stock market is in bear market territory (-20% from the high). The Fed raised its inflation outlook by 1% this week and that is significant. It said that it will not raise the Fed Funds rate until the end of 2023 (time lined moved closer) and that was better than feared (some analysts thought it might come earlier). That is why US-10 Year Treasuries have rallied. High inflation and sluggish economic growth are not a good combination for the market. Tech stocks will benefit from the drop in interest rates, but will the rally last? As I mentioned earlier the sector rotation has been brisk. This is great for short term traders, but problematic for longer term swing traders. If you are buying tech, don’t get greedy. Swing traders with a 3 to 4 week time horizon should wait patiently for a market drop. Get your wish list together and be ready to strike. These market drops don't last more than two or three days. Your next round of bullish put spreads should generate income for the next month and by that time we will be one step closer to breaking out of this range. Until then, don't force trades. Option premiums are minuscule and you have to go very close to the money to generate a decent credit if you are a seller. It’s not worth the risk. If you're an options buyer, time decay is your enemy and the market is trapped in a tight range. Yesterday the action picked back up. Some of that is related to the Fed and some of it is related to quad witching. There were great sustained moves on both sides of the market. Try to find two or three really strong movers and zero in on them during the day. This is hand-to-hand combat and it's tough to make money. Instead of looking for reasons to trade, you should be looking for reasons NOT to trade. Mistakes are costly and they are very difficult to recover from when there is no market tailwind. Heavy volume, technical breakouts and relative strength are even more important now than they were a week ago. The stock will have to do all of the heavy lifting. The market is going to break horizontal support at SPY $420 this morning. This is a quadruple witch so we could see market volatility. Make sure that support holds before you take long positions and error on the side of caution. Relative strength will be easier to spot on the open because these stocks are moving against the market. Make sure these stocks hold the bid when the market dips (ideally they are inching higher). These will be the best plays as long as you have heavy volume and technical breakouts. Watch for groups that are hot/cold and take advantage of the rotation. If the selling pressure is steady today and if we make a new low for the day after two hours of trading we could have a bear trend day. Quad witching will feed on the move and the selling pressure will accelerate. Support is at SPY $417 and resistance is at $420 and the all-time high. . .

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