Daily Commentary: December 19, 2024

Auto Post1Option Commentary

Cash Is King

Posted by Pete Stolcers on December 19
www.oneoption.com

The upside rewards were smaller than the downside risks.

PRE-OPEN MARKET COMMENTS THURSDAY – Two weeks ago I told you to scale out of longer-term bullish swing trades. We had incredible gains and we took profits into strength. I didn’t “know” that we were going to get a big drop yesterday and we don’t pick market tops. Here’s what I did know:

  1. The last leg of the market rally produce a marginal gain. That is a sign of resistance.
  2. The tiny bodied candles told us that there was some selling pressure.
  3. The light volume was a sign that recent gains were vulnerable. Buyers were not very interested.
  4. The SPY was bumping up against a long-term H+ trendline.
  5. Mega cap tech stocks were the only thing fueling the rally. IWM, RSP and DIA had been in a steady decline the last week.
  6. Bonds were selling off when the Fed was dovish. This was a major disconnect, they should have been moving higher.
  7. Triple witching would fuel a move in either direction if it was strong.
  8. The FOMC statement presented uncertainty.
  9. We have a new President and there will be policy changes since Republicans control all three branches. That presents uncertainty.

The prudent thing to do was to lock in gains. When we are in cash, we have flexibility and clarity.

Once I saw the two long red candles closing on their low I knew that the selling pressure had a chance to build. That initial move was greater than the 20-day ATR. I took a starter short and I waited for the press conference. I evaluated the height and duration of the bounce. When the market was not able to recapture more than half of the most recent long red candle, I added to the position.

The selling pressure built quickly and much of the sell-off was program generated. It pushed the market below support levels and that triggered sell stops. That in turn created a gamma squeeze. Options that were going to expire Friday and that were way out of the money were all of a sudden in the money. Option IVs spiked and anyone who has been shorting VIX took it right in the “tenders”. All of this activity had a domino affect and the SPY suffered one of its largest losses ever. It took out the 50-day MA and SPY is resting right at AVWAPQ.

There’s a small overnight bounce. Overseas markets sold off in sympathy with our market so we can’t read too much into that drop. GDP slightly better (3.1%), initial claims inline (220K) and Philly Fed weak (-16.2). The initial reaction to the numbers was muted (no impact).

What do we do now?

The move was over-exaggerated. No question about it. We have support at AVWAPQ and I believe that will hold today. The overnight gap up will be very telling. It is going to hit resistance at the 50-day MA. What happens around that MA will be important. Bulls want to attack it immediately and hold that level. The longer they can do so, the more likely we are to get a sustained bounce. There wasn’t any dire news to prompt such a big drop. The Fed is not going to cut rates as fast as expected… boo-hoo. The fundamentals that got the market to this level are still intact.

I will give you my longer-term forecast for Q1 2025 this Sunday. There are some concerns.

We are in cash. For now, I’m just trying to make some money day trading. What we would like to see is a nice rally to the 50-day MA and a pause. That will be the first level where sellers try to knock the market down. If those early gains hold, it will be a sign that buyers are interested. They were able to overpower the selling pressure and the next move will be higher. This bid check will give us the confidence to proceed without worrying about the rug getting pulled out and it is our best case scenario. It is possible that the market shoots right through the 50-day MA and it keeps going. That move will be hard to chase. The tactic is to start with a very small position. If this happens, there are likely to be some dips along the way and they could be deep. If your size is too big you will get flushed out. When those dips form higher lows above VWAP you can add. Remember, some institutions are still rolling Dec-Mar positions. They can goose a bounce.

The ultimate scenario is not likely to play out. If we get it… great. It would be an instant drop and some (but not all) of the gap up will be filled. The drift lower will come on mixed overlapping candles and that is a sign of weak trend strength. When that move finds support, take a small position. Add above VWAP, add above the 50-day and then ride the move higher. Given the magnitude of the drop, we could see a nice bounce today.

Mega cap tech stocks have been strong and that is where I would focus for longs. Even if the market has some volatility, the relative strength in these stocks will give you some cushion in the event you are early. If the stocks jumps, don’t chase, be patient. TSLA has been a favorite.

Support is at AVWAPQ and resistance is at the 50-day MA.

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