The S&P 500 is within striking distance of the all-time high, but it does not have a catalyst. There were a few technical “cracks in the dam” yesterday and I describe them in the day traders section below.

The last leg of this rally has come on very light volume and those gains can easily be stripped away. August is a seasonally weak month. This year I have noticed that we typically see selling into the monthly options expiration (Friday) and I believe that trading programs have been able to successfully force put sellers to cover positions. A daily SPY chart reveals that when the market has floated to a new high and the daily candles are small, we see a quick round of profit taking that tests the 50-day MA.

China’s economic numbers are soft and the PBOC is going to ease in Q4. Ships are cued up in China waiting to come to port and new Covid regulations are dramatically slowing the cleaning process. Part of China’s market decline can be attributed to the Chinese government regulating tech companies and there was negative overnight news on that front. China is the “canary in the coal mine” and I am watching their headlines closely.

The Delta variant is spreading rapidly in the US and vaccinated patients are catching the virus. Many states/cities are shutting down and the travel/restaurant industry is restricting service for non-vaccinated patrons.

Corporations are flush with cash and on average they have 45% more cash holdings than they did a year ago. Almost $7 trillion sits on the sidelines and that tells me that they are preparing for a soft patch.

The Fed does not plan to reduce asset purchases until the middle of 2022 and that is extremely dovish. I don’t believe that the FOMC minutes today will reveal anything new.

Should I buy puts now? No. Swing traders who have followed my advice are sidelined. The best trade will come on the long side after the market has pulled back and established support. We do not want to short a 15-month bull market rally when central banks are dovish. The market drops have been fast and furious. They do their damage and only last a few days. The snap back rallies have been violent and shorting is only for nimble traders. Stay sidelined and wait for that market drop. I believe the table could be set for one of those quick market drops. Swing traders who have been selling bullish put spreads (or who have long exposure) should exit those trades now.

Day traders should watch resistance at $445. That is the high from Tuesday and the market was not able to challenge it after the first hour of trading. The price action off of the low was very choppy with lots of retests (dips) off of the low of the day. That is a sign that every rally is challenged and that buyers are more passive (and profit takers are a bit more aggressive). Monday, buyers were relentless and you can see that in the 5 minute SPY chart. The dips were very brief/small and the price action was very orderly. From a trading standpoint it tells me that there will be some selling pressure during the day. If the SPY is able to get through $445 on the first attempt this morning we will try to fill in the gap from Tuesday and you need to focus on the long side. This scenario is less likely. If the market tests the high from Tuesday and it can’t break through, the downside will be tested and there will be a nice shorting opportunity. I believe this is a more likely scenario. In my comments yesterday I warned you not to buy early. Dip buyers who were looking for a gap reversal took a beating. An early test of the high from Tuesday would lure bullish speculators in and that is when I believe we will see some selling pressure.

The underlying theme is this. Keep it small and wait for your windows of opportunity. THIS MARKET IS NOT GOING ANYWHERE. Do not force trades and do not chase.

Support is at SPY $441 and resistance is at $445 and $447.