Sometimes no trade is the best rate. A common mistake made by novice traders is to always be in the market. It is very important to recognize when you are in a low probability trading environment.
Volumes have dropped off and we are headed for a news vacuum. My game plan has been to trade from the long side if the market breaks out to a new all-time high. If that scenario had played out, my stop would have been at the breakout and it would have been very tight. That move never materialized and now I wait patiently from the sidelines.
The SPY is at support at $180 and I doubt it will get down to major horizontal support at $178.50. I will wait for support and I am ready to buy calls. I will not load up – at that most I will trade 20% of my normal size.
The news has been good. ADP, GDP, ISM, initial claims and the jobless report have exceeded estimates. China’s industrial production and retail sales came in as expected. Global PMI’s will be released Monday and they should be good.
This morning, we learned that Congress is close to passing a budget. Both sides are grumbling, but this plan looks encouraging. Some traders feel that this gives the Fed enough breathing room to taper on 12/18 and that is why the market is reacting negatively.
I disagree with this notion and this decline is setting up a nice buying opportunity. The budget deal does not solve the debt ceiling. That will be an issue towards the end of Q1. The Fed will not taper until Janet Yellen is an office and the debt ceiling has been pushed back. When it does taper, it will probably be a “buy the news event”. Tapering is fine as long as it is accompanied by economic growth.
Europe is firming up its bank regulations and it has a plan for distressed financial institutions. Credit concerns remain low and that is good for the market.
Asset Managers are not worried that they will miss a year-end rally. They will not chase, but they will buy dips. We saw that the bid is still strong last week and the market was able to quickly recover from weakness.
Seasonal strength will fuel a year-end rally. We won’t see any major moves, just a grind higher. When the Fed does not taper next week we could see a nice rally.
We have been patiently waiting on the sidelines. Line up your long positions.
The SPY is currently at $179.80. If we rally back above $180, I will buy some calls. If the rebound continues this afternoon I will add. Again, I will keep my size small. The easy money has been made this year and I don’t want to give back profits. Wait for support and start scaling into long positions.
If the market continues to drift lower today, don’t buy any calls. A new low this afternoon would be bearish and if we see it, SPY $178.50 will be tested.
Get ready to buy calls, but wait for support.