Swing Traders Should Be In Cash – Here’s Why

Posted 9:30 AM ET - The market continues to remain extremely volatile and we are seeing selling pressure. The long-awaited $1.9 trillion stimulus bill was approved in the Senate over the weekend and there are some changes that need to be approved by the House. This should have been fantastic news for the market, but the S&P 500 has had a 70 point range overnight. Buyers and sellers are battling it out and this is a good time watch from the sidelines if you are a longer-term swing trader. A national minimum wage seems to be the "sticky point" in Congress and hopefully this will not delay the much-needed stimulus checks. The market is pricing in a swift economic recovery and that is why bonds continue to fall. The US 10-year Treasury is testing the one year low this morning. As I scour the headlines there is only one news item that caught my attention. China's exports rose 60.6% and imports rose 22.2%. Both numbers were ahead of expectations, but it's important to remember that China was in a complete shutdown a year ago and it was just starting its battle with the virus. The number is exaggerated since last year exports were down 17.2% Y/Y. I can’t find the month over month numbers and they would be more relevant. Economic growth will rebound as new Coronavirus cases decrease and as states reopen. Will that growth be enough to offset higher interest rates and will inflation be a factor? Is the stimulus bill filled with "pork" that will increase our national debt without growing economic activity? These are the questions that Asset Managers are asking. These questions are above my pay grade and I like to keep things simple. Stock valuations are high and they will normalize in time as profits grow. The market can tread water or it can pull back and rebound in the next few months to bide its time. We've seen fairly heavy selling pressure the last two weeks and major technical support has been tested. I feel that the upside is relatively limited and that there is a good chance for a normal 10% correction. Consequently, the best course of action is to wait patiently on the sidelines to see if we have an opportunity to enter stocks that we like at a better level. For this reason, swing traders should remain sidelined. Day traders will have lots of opportunities on both sides intraday. I suspect that the stimulus bill could be a "sell the news" event. Use the 50-day moving average as your guide. Let the early volatility subside and spend the first hour looking for relative strength/relative weakness. If the market is above the 50-day moving average, favor the long side. If the market is below the 50-day moving average, favor the short side. If the market is making a new high for the day after two hours, favor the long side. If the market is making a new low for the day after two hours, favor the short side. Use Option Stalker searches to find stocks with relative strength/weakness and heavy volume. This is standard operating procedure and we should have decent volatility today. If the market closes below the 50-day moving average, consider holding some shorts overnight. Support is at SPY $372 and resistance is at $387. That is a wide 150 point S&P 500 range. The 5-day average true range (ATR) for the SPY is 8.0 and it was 3.16 a month ago. That shows you how volatile conditions have become. . .

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