Market volatility is starting to increase and I noted this in my comments Tuesday morning. The S&P 500 dropped 60 points Monday morning and that was a warning sign. For the last two weeks I’ve been pointing to this timeframe and urging swing traders to get to the sidelines. Tech giants are reporting and that typically keeps sellers at bay. Microsoft reported earnings yesterday and Apple and Facebook will report after the close today. The upside rewards are smaller than the downside risks.

Microsoft posted excellent earnings and the stock rallied on the news. AMD and Texas Instruments also reported good numbers, but the reactions were muted. I believe that tech companies will post excellent results, but that might already be priced into the market with stocks trading at a P/E of 40. The reaction to Apple and Facebook this evening will set the tone for the rest of the week. Google and Amazon will report next Tuesday.

The FOMC statement today will be dovish. This should provide support for the market. The Fed will keep interest rates at historic lows and they will continue their quantitative easing well into 2022.

The spread of the Coronavirus has climaxed in most of the country, but the vaccinations have been slow. This is also true in Europe. Fortunately, the vaccines seem to be effective for the new mutations.

Democrats control Congress and the White House so a stimulus bill is likely. Chuck Schumer said that if Republicans stand in the way, Democrats will advance the relief bill without them. The $1.9 trillion price tag comes on the heels of $900 billion that was approved in December. These are mind boggling numbers.

If the market were going to melt up it would happen this week. Given the 45 point S&P drop this morning it looks less likely. We are seeing signs of a “bubble” when weak stocks skyrocket on short covering. This price action reminds me of the.com bubble in 2000. The reaction to Apple and Facebook needs to be incredibly strong and DC needs to move quickly on the stimulus bill for the market breakout to happen. Once we get into February, I believe that the likelihood for profit-taking increases.

Swing traders should largely be in cash. We have three bullish put spreads that will expire Friday and two bullish put spreads that will expire a week from Friday. I don’t plan on putting any new trades on this week. I want to go to cash and I want to see how all of this plays out. We have been selling these out of the money bullish put spreads to take advantage of accelerated time decay and the positions give us breathing room for market pullbacks like this. We have been taking advantage of heavy volume and relative strength. We have also been selling the spreads below technical support and we have been focused on stocks that have a tendency to rally into the earnings announcement. Even with all of these statistical advantages, the next few days could be tense.

Day traders should expect two-sided movement. The ranges have been wide and we are seeing nice drops during the day. I still prefer to focus on the long side since the market is in an upward sloping channel. When we have market drops I wait for signs of support and I start buying stocks with relative strength when the 1OP indicator has a bullish cross after a deep trough. I have been able to find nice shorting opportunities as well. If the market makes a new low after two hours of trading, favor the short side. The open will test the low for Monday. If the market is able to hold the low of the day after two hours we are likely to bounce. I believe the FOMC statement will calm some nerves (2:00 PM ET) and buyers will keep the bid alive ahead of Apple and Facebook after the close. Use extra caution if you are trading the short squeezes. Set targets, take profits and don’t look back.

Support is at $377 and $379. Resistance is at $382 and the all-time high.