How we got to this price tell us which scenario is most likely.

PRE-OPEN MARKET COMMENTS THURSDAY – “OMG… the sell-off is finally here and the market is going to tank.” This is what many traders are thinking this morning. They can’t believe the market ever got this high and the AI bubble is going to burst. If this is you, take a deep breath.

I was fairly bearish back in May and June so I can relate to this mindset. Since then I have seen brief and shallow dips that have led to substantial new highs. This price action is bullish. The market has been able to deflect bad news and it is focused on lower interest rates.

We’ve been waiting for a pullback. The SPY rallied well above the EMA 8 and every time we see that it sparks profit taking. Bullish speculators are flushed out, call premiums get annihilated, the market drops below the EMA 8 and it bounces. That is what I am expecting this time around and I am focused on trading the bounce.

Our swing trades have focused on selling OTM naked puts on volatile stocks and they will drop today. No worries if you are prepared to take assignment. These stocks can drop substantially before they are ITM and recent price action tells us that institutions have been buying. When the market finds support these stocks will rebound and the puts are likely to expire worthless. I’ve been through this cycle a few times this summer.

We’ve been focusing on day trades while we wait for this drop and our overnight risk exposure is minimal.

When support is established this will set up a nice entry point for bullish swing trades and we need to be ready to strike. Seasonal weakness will end in a few weeks and then seasonal strength will kick in. The market is likely to grind higher into year end and the tight intraday ranges we endured the last few weeks will return. Be ready to buy.

If you short this move you are trying to get cute contra trend trading. Most of you will overstay your welcome and when the bounce comes you will be scrambling to mitigate losses instead of focusing on buying stocks that are going to rally into year end.

How can I be so sure? Price action. How we got from point A to point B matters. The rally we’ve witnessed this year is strong and buyers have been aggressive.

How deep will the drop be? I don’t know so I am going to watch for signs of support. I hope it is deeper than normal so that I have time to enter longs.

What about the government shutdown? Politicians will strike a deal like they always do. Trump is threatening government job cuts if they can’t reach a deal and Dems don’t want that. This is just an excuse to take profits and this move is a shakeout.

GDP and initial jobless claims were both better than expected this morning.

We’ve seen a decent amount of selling pressure the last few days so I would not discount the drop today. Let it come in and let’s see how far we drop. An early bounce with stacked green candles would be a sign of aggressive buying. If we see that the gap will fill quickly. I would prefer a gradual drift lower that gathers momentum. That will give me time to evaluate stocks and I can see which ones hold up. I am most interested in the high fliers. Some will get their wings clipped and I will avoid those. Stocks that have run hard and that hold steady have more upside.

Support is at $654.30 and resistance is at EMA 8.