Daily Commentary: December 10, 2020

Jeremy Engelbrecht1Option Commentary

We Expected This Market Drop – Start Shopping and Get Your Wish List Ready

Posted by Pete Stolcers on December 10

Yesterday the market took a breather and stocks closed on their low of the day. A bearish engulfing candle resulted off of a new all-time high and that is a little negative. The last leg of this market rally is over-extended and we expected some profit-taking. There is not much overnight incremental news and the downside to be tested today. Once support is established the market will find its footing and float higher into year-end.

The Brexit talks last night did not yield any new developments except that a “drop dead” date this Sunday was established. Boris Johnson will not negotiate after that. This could be a speed bump Monday morning if there is not any progress.

All of the other puzzle pieces are the same. States are shutting down because of the rapid spread of the Coronavirus and this will impact economic activity in Q1. Vaccines will be distributed in coming weeks, but it’s uncertain how many doses will be available and we don’t know how many people will choose to be vaccinated. This will take at least a few months to play out and stock valuations are rich at a P/E of 40.

Will Asset Managers hold the line during Q1 or will they take profits and wait for a better entry point? That is the $10,000 question.

Swing traders should not be adding to bullish positions until this market drop runs its course. Manage open positions and let time decay work its magic. During this market decline we are evaluating stocks and we are searching for relative strength. Once we have market support we will sell out of the money bullish but spreads on these stocks. I’m not expecting a big drop, but SPY $360 could be tested in the next few days. I don’t believe that this dip is going to last more than a week. Get your Christmas wish list together and be ready.

Day traders should expect the downside to be tested this morning. We will not have a meaningful rally until support is established. The bearish engulfing pattern from yesterday is a little daunting, but I’m not expecting a huge round of selling. If the market makes a new low for the day after two hours of trading, favor the short side. I still prefer to trade relative strength and to buy stocks. Today I will have to be a little more cautious on the open and I will have to wait patiently for the low to be set.

Support is at SPY $365, $363 and $360. Resistance is at $367.50 and $370.

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