The headwinds are blowing and resistance at the all-time high is stiff. Last week the rally took a breather and we saw a light round of profit-taking. The upward sloping trend line and the 20-day moving average were tested last Thursday and they held. Merger Monday has buyers excited and stocks are up before the open.

I’ve been searching the headlines to find a catalyst and there really isn’t any new incremental news. The biggest development is that the “drop dead” negotiation date for Brexit has been extended. The clock is ticking and this could be disruptive for European markets/commerce in the next week if there is no compromise.

Pfizer is scrambling to distribute its vaccine and the logistics are complicated. Ideally, healthcare workers are vaccinated by year-end and that would account for most of the doses (24 million) this year. We still don’t know how many doses will be available or how many people will choose to be vaccinated. New cases continue to escalate and this will weigh on economic activity in Q1.

The FOMC meeting this week is a non-event. Fed officials are as dovish as they can be and it’s time for fiscal stimulus. Politicians are still haggling over a $900 billion deal and it is likely to get lumped in with the 12-month omnibus package Congress has to pass by Friday to avoid a government shutdown. This will drag on to the final minute.

Stocks are priced for perfection at a P/E of 40 and caution should be used. I believe that we’ve not seen the end of the selling pressure and that we will see more weakness this week. SPY $360 could be challenged.

Swing traders should selectively sell out of the money bullish put spreads. Throttle back and manage your open positions. If you’ve been sticking to my model where we sell spreads that expire in three weeks or less, time decay has been working in your favor. We have seven bullish put spreads that will expire this Friday and I don’t plan on adding many new positions until then. This is a low probability trading environment and seasonal strength is providing support.

Day traders should use caution on the open. Gaps up have been the hardest to trade because relative strength is more difficult to identify and because stocks are overextended on the open. I will be watching carefully during the first hour of trading. If the gains are able to hold the chances of a reversal are slim and I will get more aggressive with my longs. If the gap from the open is starting to fill I will be much more cautious and if we make a new low after two hours of trading I will favor the short side. Trading volume will decrease during the next two weeks. Trim your size and your trade count. As the volume drops you should lower your targets (get more passive).

Support is at SPY $363 and resistance is at $367.50 and $370.