Yesterday the market took a breather and stocks finished lower for the day. The market rally is overextended on a technical basis and bullish sentiment has not been this high in decades. Asset Managers are leaning on the safety net provided by central banks and today we will hear from the Fed. I am expecting dovish comments and analysts are not expecting any rate hikes until late in 2022. Look for sideways action the next few weeks while the market waits for clarity. I believe there’s a chance that we will see a pullback to SPY $300 in the next few weeks and my overnight risk exposure will be light until then.

New Coronavirus cases are on the rise as states reopen. Texas has more virus patients hospitalized now than it did at the previous peak a month ago. Given the devastating economic impact, I don’t believe states will shut down again even if new cases spike. This virus is resilient and consumers might be slow to resume their normal lifestyles.

The rotation out of tech and into the laggards paused yesterday and the biggest tech companies (Amazon, Apple, Facebook, Google, Microsoft and Tesla) fueled the rally. The NASDAQ 100 finished at a new all-time high.

The economic news has been encouraging. Last week’s jobs numbers, ISM manufacturing/services and the official PMI’s out of China were dramatically better than feared.

Stocks need time to grow into current valuations and I am expecting sideways movement for the next few weeks. The possibility of a swift pullback is high given that bullish sentiment is at record levels.

Swing traders need to be very passive. We have three bullish put spreads that are trading for pennies – two of them will expire worthless Friday. Tonight I will post my Weekly Swing Trading Video and I will highlight four new trades. In each instance we will only get filled if the stock pulls back. If we are not able to enter these trades we will wait patiently for a market dip. Experience has taught me that this is the best approach. Instead of trying to manage losing trades on a market pullback, we will be focused on entering new trades. Option implied volatilities have declined and we need to go close to the money to get the credit we want. This means that our positions are much more sensitive to price movement and risk is elevated. February was the last time our cash position was this large and our patience was rewarded.

Day traders should look for two-sided price action. That means we are likely to see nice ranges and movement between the extremes during the day. Stocks have rallied so far that nice shorting opportunities are presenting themselves intraday. It has been difficult to make money on the short side in the last few months, but that is changing. Of course, there will also be excellent buying opportunities. We are using the 1OP indicator in Option Stalker on a five minute basis to time our longs and shorts. I like buying strong tech stocks and I like shorting some of the laggards that have run hard in the last two weeks. Trim your size and your trade count. I am trading half of my normal size in the morning and 1/4 of my normal size in the afternoon. This is a low probability trading environment. I know this is hard for most people to grasp given that stocks are floating higher. Keep in mind that light volume rallies can reverse quickly. All it will take is a stiff round of profit-taking to flush bullish speculators out of the market. Once that starts to happen, sell programs will kick in and the momentum will feed on itself. I’m not looking for a prolonged market decline, just a swift and steep drop that lasts two or three days.

The early action this morning will provide some opportunities. Make your money early and then wait for the FOMC statement.