The information we gather during the next week is going to tell us how aggressive buyers are and now much higher the market might go.

PRE-OPEN MARKET COMMENTS FAT TUESDAY – Before the FOMC statement we exited our swing positions. We had monetary policy, earnings releases and the jobs report to navigate and it was prudent to take gains ahead of material news after a big market run-up. Since then we have been able to catch the remaining move up with short-term day trades. We have not had overnight risk exposure and we are waiting for a compression or a dip.

Trading is like Nascar. You decelerate (take gains) into the turns and you hit the gas (re-enter) on the straight aways. The tricky part about trading is recognizing the turns ahead of time because the track is always changing.  

The S&P 500 is down 90 points from its high yesterday. The CPI came in hotter than expected (.4% vs .3% expected) and this is going to keep the Fed from cutting rates any time soon. Is this number that bad? No. Some of the selling this morning is tied to the number, but most of it is profit taking at the all-time high and bullish speculators getting flushed out.

I mentioned the warning signs in my comments yesterday. Long red candles off of a new high and late day selling on good volume.

I enjoy watching a storm roll in when I am in a safe place. I hope you are largely in cash watching from sidelines. I don’t know how deep this dip is going to be and I don’t know how long it is going to last. The price action I see is going to tell me how over-extended bullish speculators are and how aggressive buyers are. The price action the last 3 months suggests that this is going to be brief (5 days) and shallow ($490). If it lasts 10 days and we test AVWAPQ, it tells us that the selling pressure is fairly strong and we need to temper our upside expectations.

The market was testing the upper boundary of a trading channel and as I mentioned, good shorts were starting to pop-up on our searches. These are early warning signs.

Cash is king! Instead of containing the damage from positions that are falling apart, you are looking for opportunities. You are emotionally unencumbered and you have clarity. Don’t #$%^ it up by sticking your head in the noose. This is a big drop and it is going to take days to resolve. Chances are there will not be a good buying opportunity today and swings are off limits. We need to find that low and we need to see signs of support.

What about selling OTM bullish put spreads? No. We need to find support first.

Pros can day trade the short side, but I would avoid the open. This is a big drop and much of it could reverse in the first hour, we don’t know what to expect. The price action on the way down and the height and duration of the bounce are going to tell me what to expect from the market. I will use the same approach to determine which stocks are good for shorting and how far they might fall.

Novices should spend the next few days monitoring stocks. Look beyond NVDA and find relative strength. Get your lists together and be ready. A bounce could come quickly.   

This drop is going to set up a good buy in the next week or two, we just have to be patient.

Support is at SPY $492 and resistance is at $500 and the all-time high.