This morning the S&P 500 will test the 200-day moving average and this support level was tested three times last week. Typically, bulls don’t want to have a retest so soon and it’s likely that we will test the 100-day moving average shortly. Coronavirus fears are accelerating as the number of new cases increases. This will impact consumer spending and the recovery will take longer than we hoped. If you’ve been following my comments in the last two weeks your risk should be minimal and you should be waiting on the sidelines for clarity.

The missing piece of the puzzle is the speed of the economic recovery. A few weeks ago it seemed like we would be off to the races and now we know that consumer spending will be relatively subdued. Businesses have taken advantage of the PPP, but if new orders are slow to materialize, workers could be laid off. People will not spend if they feel that their job security is questionable.

The Fed will continue to print money and they are buying corporate debt. Companies are flush with cash and this should keep credit concerns at bay during the summer. However, the longer this recovery last, the greater the risk of a credit crisis. Politicians are considering a $1 trillion infrastructure bill and $1 trillion in additional stimulus. If the economic recovery drags on we can expect unemployment benefits ($600 per week from the government) to be extended beyond the August 1 timeline.

Earnings season will begin in a few weeks and the bottom line devastation will be known. If the economic recovery was robust, investors would look past a weak quarter and they would embrace current valuations knowing that better times lie ahead. Unfortunately, the recovery is going to last longer than expected and the appetite for stocks could soften with big quarterly losses and light consumer spending.

We’ve never had to face a pandemic before so there is no reference point. This virus is very resilient and I have been urging you to wait for clarity. This is a light news cycle and right now it is negatively biased. I believe that we could see a fairly decent round of selling that tests SPY $295. Apple has closed some of its stores in the Houston area as the Coronavirus spreads.

Swing traders should largely be in cash. During the last week we’ve sold one bullish put spread and we sold a couple of naked puts on strong stocks that we would like to own. In last night’s Weekly Swing Trading Video I highlighted four bullish put spreads that should work well. We will need a pullback to get filled and I believe our chances are fairly good today. Stock selection is critical given the backdrop. I was looking for stocks that will perform well if the economy struggles to recover. We are selling spreads with less than three weeks until expiration so that we can take advantage of accelerated time premium decay. A major holiday is approaching and that usually translates into low trading volume and tight ranges. The end of the quarter is approaching and we could see some profit-taking as funds rebalance.

Day traders should use the 200-day moving average as a guide. If the S&P 500 blows through that level early in the day and if it is not able to rally back above it, we will see a bearish trend day. If this scenario plays out, favor the short side and focus on travel and entertainment. Initial unemployment claims were higher-than-expected (1.48 million versus 1.35 million expected). I believe that we will see a heavy round of selling today. Buyers will not stand in the way until they know that support has been established. If the market finds support at the 200-day moving average and a trading range is established for most of the day it would be a sign that buyers are still engaged. In that event you can buy strong stocks with relative strength on market dips and you can short weak stocks on market rallies. Use the 1OP indicator on a 5 minute basis as your guide.

Bears need technical confirmation before they can buy puts. A close below SPY $295 is needed at minimum. Start nibbling on short positions if you see this. Follow through selling the next day would be bearish and then you can start to ramp up your short positions. Until we get a technical breakdown with follow through, don’t buy puts for overnight trades if we are not below SPY $295.

I WILL NOT BE POSTING PRE-OPEN MARKET COMMENTS FRIDAY. If we get a huge overnight market drop I might weigh in with a few sentences. If that happens, you know what to do.