Yesterday the S&P 500 was within 15 points of the all-time high. After attempting to rally to that level most of the day, buyers threw in the towel. Profit-taking was brisk and the futures closed 50 points off of their high. We are in a very light news cycle and this is the type of price action we can expect during the next few weeks. I feel that the upside rewards are smaller than the downside risks.

Europe reported Q2 GDP growth was down over 12% on average. The UK was most notable and its growth declined 20.4%. There are signs that the Coronavirus is spreading in parts of Europe.

In the US there are signs that the virus spread rate is starting to flatten out, but the number of new cases is still elevated levels. Schools are attempting to reopen and the plans vary geographically.

Tesla announced a 5:1 stock split and Apple unannounced a 4:1 stock split two weeks ago. As an option trader I welcome this because it will improve liquidity.

Congress doesn’t seem very interested in striking a stimulus deal. The market expected $1.5 trillion in aid and I believe that this will weigh on the market if it is not addressed immediately. Many small businesses are on the brink of closing after the second wave of the virus forced states to retreat to Phase 3. The PPP is running out and businesses will be forced to lay workers off. I will be watching weekly initial jobless claims and if the average stays above 1 million it will be a warning sign.

Earnings season is winding down. Revenues were down 11% on average and earnings were down 33%. Investors are expecting a robust recovery in Q3 and given the spread of the virus, I believe that there is room for disappointment. Stocks will need time to grow into their current valuations. That means that at best, the market will tread water and that the possibility of a pullback is high.

Swing traders who can’t watch the market during the day need to be in cash. We will patiently wait for a market pullback and then we will start selling out of the money bullish put spreads. At current market levels this is a risky strategy because the spreads can instantly be in the money if we see profit-taking for a few straight days. Yesterday’s intraday reversal was a classic example. Everything looked fantastic early in the day and it seemed like we were going to challenge the all-time high. Conditions changed in an instant. Once the downward momentum was established the bid dried up.

Day traders need to watch for two-sided price action. After a heavy round of selling yesterday I believe that the downside will be tested early this morning. Buyers want to make sure that the bid is strong before they commit. I will be looking for tech stocks that were weak yesterday and that are bouncing on the open. Once that bounce stalls I believe that the selling will resume. Once support is confirmed you should buy stocks with heavy volume and relative strength when the market dips. Expect light volume and choppy trading. We are seeing a rotation out of tech and into laggards.

This is a low probability trading environment. If you are “leaking oil” every day, stop trading. You are going to piss your capital away and you will regret it when conditions improve. I am trading 1/2 of my normal size in the morning and I am trading 1/4 of my normal size in the afternoon.

I won’t aggressively short with overnight positions until we close below SPY $324. SPY $325 is an important level and you should use that as your guide today.