The market bounce is starting to stall below a major resistance level.

PRE-OPEN MARKET COMMENTS WEDNESDAY – The market bounce was substantial and the high from a week ago has established a short term high. SPY $550 is a horizontal resistance level and the market is treading water just below it as earnings season kicks off.

This morning we learned that semi conductor equipment sales projections are soft. ASML reported that demand is lower than expected because customers are holding off on new purchases until they have more clarity on the tariffs. Furthermore, Nvdia is taking a $5.5 billion write down on chips that it had planned to sell to China. Other manufacturers might be forced to do the same. Bank stocks were able to move slightly higher after the initial earnings reactions, but they are starting to lose their momentum.

Trump is raising Chinese tariffs to 245% and we are in a full blown trade war. China is restricting exports of rare earth minerals to the US. They control about 90% of the world’s supply and they are used to produce electronics. This has been a source of vulnerability for many years and alternative sources have not been pursued/developed. China also mandated that their airlines cancel Boeing orders. This is a full scale trade war and many ports in China have mountains of containers piling up. Even if an agreement is reached, there will be supply disruptions.

Bond and currency markets have been in a flux and that is a warning sign. Volatility at the sovereign level reflects uncertainty and it precedes big market moves.

We were waiting for a bounce and we got one. Selling naked puts has been an effective strategy the last week and there is still a little room for that strategy, but you need to select your stocks very carefully. Don’t take your eye off of the prize. The next meaningful market move is down. If you have patiently been waiting for this bounce to hit resistance, you are in cash and you are ready to strike.

What do we know about long green candles during a down trend? They are often “solos”. These are attempts to squeeze shorts and they are often hammered right back down. The key is to watch for follow through buying. If we see it, we need to respect the long green candle. If there is no follow through, the bounce is fake and the move lower will resume. As the long green candle is retraced, the selling pressure accelerates.

Retail sales came in slightly better than expected this morning at 1.4%.

The SPY is down over 50 points overnight. Between ASML, Nvdia and the trade war with China, the news is bearish. The market was not able to test resistance at $550 and I believe today could get “ugly”. I am short before the open and the SPY is below AVWAPQ.

From a swing trading standpoint the puts you sold a couple of weeks out should be safe. If they are trading for pennies, you have realized your gains, buy them back. For remaining open positions I would not worry about them. Be prepared to take assignment and know that the stocks would have to drop a great distance in the next week before you are assigned. I feel this is a good time to start lining up your shorts. You might consider taking a few bearish positions, but I would be more inclined to short stock vs buying expensive puts. Earnings season is ahead and when the Senate reconvenes they are likely to pass a budget that includes tax cuts. This could buoy the market for another week or two. We are also likely to hear of a trade deal or two in the next few weeks. The tariffs are getting the headlines, but the global macro backdrop is very weak. That is a much greater concern.

From a day trading standpoint I am expecting a bearish day and this is one of those rare times when I would be looking to take shorts early in the day. This is a holiday shortened week and the action is likely to die down Thursday.

Support is at AVWAPQ and resistance is the close from Tuesday.