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Snap Back Rally
www.oneoption.com
The market over-reacted to the tariffs and this is the bounce we expected.
PRE-OPEN MARKET COMMENTS TUESDAY – Yesterday the SPY tested $480 and it bounced. That was a resistance level and you can see it on a monthly chart. That has now become a support level and sellers were kept at bay yesterday. After three consecutive gaps down, the bleeding stopped yesterday. Moves of this speed and magnitude are rare. The selling pressure from Asset Managers reducing risk was absorbed by buyers and we are seeing follow through this morning.
Swing traders should have sold OTM naked puts on strong stocks yesterday. Those option IVs got crushed and you never had to sweat the trade. This morning those puts will vaporize. When the market hits resistance in the next few days, reel them in. Don’t lose sight of the fact that the next great swing window will come when this bounce stalls and when it rolls over. The issues plaguing the market are not going away, this is just an oversold bounce.
Day traders should prepare for a gap and go higher. After a deep drop the last few weeks, the market was due to bounce. Buying a gap and go when the market is making a new all-time high if for fools. The odds or a gap reversal are high and the downside risk is huge after a big opening move higher. That is not the case with buying a gap and go after a massive market drop. The rubber band is stretched and it is ready to snap back. Even if the overnight move higher is big, it is not big relative to the three week range. There is plenty of upside. Shorts will cover and they are buyers. Dip buyers will view this as an attractive entry point and they will be fairly aggressive. That means we can embrace gap and go moves up if they come after deep lows.
The initial overnight move is huge and the futures are up 140 points. You don’t have to rush into trades, but you should plan on taking small starter positions in the first 45 minutes. Add to them on confirmation. Look for stocks that have not been punished the last few days and that do not have overhead resistance. They have relative strength and they will fly. If the stock has a minor gap up, it will have plenty of upside and you won’t feel like you are chasing. It will have to catch up to the overnight move.
Don’t be the fool who views this as anything more than an oversold bounce. Do not overstay your welcome on the long side. Ultimately, this bounce is going to hit resistance around AVWAPQ and that will set up an excellent entry point for swing shorts. We want the remainder of this bounce to be wimpy and to struggle to get back to AVWAPQ.
Support is at $505 and resistance is at $523.70 (open from the long red D1 candle).
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