Credit Conditions Have Soured Quickly

This morning Credit Suisse is in trouble. Global credit markets will tighten.

PRE-OPEN MARKET COMMENTS WEDNESDAY – Credit concerns are spreading and Europe is particularly vulnerable. Credit Suisse has been a “bad actor” for years and the exposure is about $600B. The bigger issue is the loose monetary policies by the ECB for well over a decade. They have allowed banks to pledge junk to secure loans and that practice still continues. I don’t want to get too far into fundamental analysis. The market technicals are week.

The PPI fell .1% and that was welcome news. It will give the Fed some breathing room next week.

We are seeing long red candles through major technical support levels on heavy volume. I believe we are going to see more selling into the FOMC. My thesis for the market finding support had one caveat, “As long as credit conditions remain stable.” That has changed in a matter of days.

Swing traders should take a short position on the open today. I suggest closing out your bullish put spreads. We just started dipping our toe in the water a few weeks ago so your exposure should be fairly limited. This is a dramatic change from a week ago, but conditions have soured quickly. Asset Managers will stay sidelines until the dust settles and the market bid will soften. This could take weeks, but they will be watching for signs of contagion. We are going to stay short and we will use a stop of SPY $395 on a closing basis.

Day traders should wait to see what happens on the open today. We are likely to see some big swings and smaller size will help you weather the moves. There will be bounces and opportunities to short. Any bounce on the open I would consider a gift. Let it run its course and then start to scale in. Watch for mixed overlapping candles during the bounce and then a compression with wicks. Bearish hammers or a bearish engulf off of the hod will be patterns to watch for. If this drop is legitimate, more than half of the gap will be preserved and the early bounce will be relatively shallow and brief (less than one hour). That will be a sign that the selling pressure is heavy.

Support is at the low from Monday and resistance is at the high from Tuesday and SPY $393.