This Market Drop Will Help You In 2 Ways – Here’s What To Do

March 5, 2021

Posted 9:30 AM ET – Higher bond yields finally cracked the market yesterday and major indexes closed below technical support. Tech stocks were impacted the most and the NASDAQ 100 closed below the 100-day moving average. Traders were expecting Jerome Powell to confirm the Fed’s dovish stance and they were not satisfied with his remarks yesterday. This morning’s jobs report was better-than-expected and we are seeing a nice bounce before the open. There are cracks in the dam and my market bias has shifted to slightly bearish for the next few weeks.

The Unemployment Report showed that 379,000 new jobs were created in the month of February and that is better than the 182,000 that was expected. This number runs contrary to the ADP report which came in light two days ago. The other economic data points that were released this week underperformed as well. US 10-Year Treasuries closed on their one year low yesterday.

The market is not excited about the stimulus bill since it will greatly increase our national debt. Of the $1.9 trillion, only $300 billion is earmarked for stimulus checks. Traders are wondering if the vast majority will be wasted. The stimulus bill is largely priced into the market.

I’m not going to dissect policy, I just follow price. The technical breakdown yesterday will gain momentum if the S&P 500 finishes the week below the 50-day moving average and if the NASDAQ 100 finishes the week below the 100-day moving average. Margin borrowing on a dollar basis is at record levels and bullish sentiment has been extremely high. Weak hands will be flushed out and we know that retail traders win in up to their eyeballs chasing short squeezes. Stock valuations are lofty and time is the critical component. Profits need to catch up and this market decline could take a few months to resolve (it has find support and then rebound back to this level). By the end of Q2 the economy should be back on its feet and this soft patch will have run its course.

Swing traders should wait patiently for market support. Yesterday we took our lumps and exited most of our bullish put spreads. An excellent buying opportunity will present itself in the next month or so. Be ready to sell out of the money bullish put spreads. It is still too early to buy. I am not looking for a deep and drawn out correction that lasts for many months. Economic conditions will improve rapidly now that new Coronavirus cases are declining and states are reopening. These market pullbacks are extremely useful. Apart from a better entry point, they give us an opportunity to monitor relative strength. Stocks that hold their value extremely well will be the first to rebound when the market finds support and you should start making your wish list.

Day traders should watch for intraday price movement. I stated yesterday that you should favor the short side if we make a new low of the day after two hours of trading and that was good advice. I also stated that we should favor the short side if the S&P 500 is below the 50-day moving average. After a heavy round of selling yesterday, expect the bid to be tested this morning. Opening gaps higher have been a fade recently. The Senate is likely to pass a stimulus bill this weekend and that should keep sellers at bay. Look for an early pullback and stability the rest of the day. If we did not have a stimulus bill pending, I would have favored selling pressure into the weekend.

I believe this will be an “inside day”. Support is at the low from Thursday and resistance is at the high from Thursday. Also watch the 50-day moving average at SPY $381.
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