Last week the S&P 500 finished on a soft note and we are seeing follow through selling this morning. The S&P 500 is down 50 points before the open and global markets are weak. We are going to exit our half position of SPY on the open and will take a small loss.

Friction between the US and China is the problem “du jour”. China has been on my radar for many weeks and it has nothing to do with cyber-attacks. Chinese stocks are in a bear market and you have to wonder why since they would be the first beneficiaries of a global economic rebound. China reopened its economy 10 months before the rest of the world and activity should be humming. However, Macau gaming revenues in June were down 73% compared to June 2019 (pre-pandemic). You would think that life would be back to normal and it is far from it. There are many other signs of strain and I believe that the world’s growth engine for the last two decades is struggling. Hyper growth breeds inefficiency and excess and I sense that there could be deep-seated problems.

US Treasuries have been moving higher even though inflation numbers are extremely “hot”. The Fed has raised its inflation projections by 1% and we would typically see bonds decline. In the last two weeks I have questioned this “disconnect” and I suspect that the bond rally could be a flight to safety. The TLT is jumping this morning.

The Delta variant is spreading quickly and countries/states are considering new restrictions. Pfizer is already working on a booster shot and scientists trying to determine how long the vaccine lasts.

I have a simplistic view of the market. Stocks are priced for perfection and surprise favors the downside. Any “fly in the ointment” can spark profit-taking. I have mentioned that there is a volatility skew to the upside. Calls are more expensive than puts and that is a sign that Asset Managers are unhedged. Bullish sentiment is extreme and big market drops happen when no one expects them.

We entered a one half SPY position a few weeks ago at $427 and we will exit on the open this morning for a tiny loss. I have been urging swing traders with a 3 to 4 week time horizon to stay sidelined. Drops like the one we are seeing today will strip away gains that have been made during the last couple of months and then some. Instead of managing losing trades this morning you will be looking for opportunities. I would not buy this first drop, but support at the 50-day MA should attract buyers. I have mentioned that I will not start swing trading until I see a sustained market recline lasts for more than a week. Be patient and watch for support.

Day traders need to be patient on the open. The first 45 minutes of trading will dictate how the day unfolds. If the market stays near the low of the day for the first two hours of trading we are likely to creep higher and we could fill in some of the gap. If the market bounces right out of the gate, I will be watching for resistance and looking for shorting opportunities. This is heavy selling pressure and it will take time for support to form. There will be fantastic opportunities on both sides of the market today. I will provide play-by-play commentary in the chat room and we will be using the 1OP indicator as our guide.

Support is at $$23 and $426. Resistance is at $431.