Equities are Perched at the Edge of the Cliff…

Stocks fell the most in two months today, and I am sure there will be plenty of "Market Crash Looming" or "The 33% Pullback in Stocks Has Already Started" articles popping up at your local top calling financial publication over the next 48-72 hours. It's to be expected as all those watching the news tonight, will be wondering what the heck happened today, and searching the web for an answer.

So why did the market sell-off today?  Some say it was Apple (AAPL) that dragged down the market, as social media came alive with #bendgate and an  IOS 8 update was pulled yesterday  after causing IPhones to lose cellular reception. Others would say it was the lackluster August Durable Goods report  which showed a drop of 18%. Or maybe it was the continued ascent of the U.S. Dollar, who's strength can take a bite out of the earnings of U.S.  companies doing business abroad. Heck, there are some even as bold as to cite Rosh Hashanah as the catalyst for the pullback. My guess? No one really knows the exact answer. The real question is, what will happen tomorrow and going forward. The Bears will say this is the start of the long awaited crash, while the Bulls will say this is just another buying opportunity in waiting, as all the others have been over the past 5+ years.

My stance? I am still bullish on equities, and think Bonds, Treasuries, Gold, Europe, Japan,  China, and other assets classes  are not the first choice when it comes to folks putting their money to work and looking for a return on their investment. More on that in a future post.(For what it's worth, I have been a Market Bull since late 2011.  You can read my thoughts over the past year, where I put crosshairs on the 2k level on the S&P: https://www.optionmillionaires.com/market-headed-higher-part-2/ ) . At the same time, i think this market is primed for a short pullback, and today's action confirmed some of my concerns since Friday.

I voiced my concerns on the morning watch list on Tuesday:

I remain a market bull, but at the same time know markets just don’t head straight up, and think the S&P is set to test its 50dma in the coming days, which would put the SPY at 196.89. We could see further downside on a break below there.

Couple of reasons for my change of stance here since friday:

No headwinds – the Fed and Scotland vote remove two, and China #’s overnight came in better then expected . Syria might be considered a possible headwind, but for now, it’s just takes up coverage time on T.V. and in the media. Sept – still the worst month historically for stocks, and think further weakness will shake some to take profits. Last but not least, I get nervous on pullbacks with no real catalyst…

Posted my charts and thoughts on Twitter:

UPB also posted a very prophetic chart last night and sounded a warning:

My concerns short term lie with the current S&P 500 futures chart.  We need to break current resistance tomorrow, or we could be looking at a test of this mornings lows in short order, and ultimately a break to lower prices.  Yeah, I’m a realist.  I’m not going to slam my head against a wall fighting a market, I do after all trade with real money.  I can’t afford to be wrong everyday.

And my thoughts again this morning even with the futures in the green when I penned it:

Markets rallied yesterday, ending a 3-day losing streak for the S&P. The $SPY closed at $199.56 and the 50dma sits at $196.98. Want to see another green day today to feel better about adding more call positions, and I am a bit worried about a fade today.

Sure enough, the markets faded at the open - slowly at first, but then the selling picked up steam.  The S&P broke and closed under the 50 day moving average. And for me, I think that sets us up for continued pressure short term and a move to at least $193 on the SPY in the coming sessions.

Sell-offs with no true catalyst are the ones that get my attention. Janet Yellen makes a gaffe, the biggest  Bank in Portugal defaults on their debt,  the U.S. credit rating is lowered - these are events that would put explainable pressures on equities prices. Today we lacked one. With markets just a few days removed from all time-highs, a pullback is welcome. And a decent pullback would be enough to  shake the bulls, and embolden the bears. And I think that will set the market up for more highs before the year is out.

Here is where I think we find some support now after we closed under the 50 day moving average today:

I was keeping it small coming into today, and will look to continue to play some puts for more downside in the next few sessions, or until we get back above $196.99 on the SPY.

Happy trading all!!

- JB

JimmyBob (Scott)has been trading equities for over 15 years, a majority of which were OTC micro-cap stocks. He started trading high risk stock options over the past 7 years, and has proven winning trades in excess of 15,000%.

As one of the Co-Founders of optionmillionaires.com, Scott enjoys sharing his knowledge with other investors through timely blog posts, daily watch lists in the forum, weekly webinars, and helpful advice within the chatroom.

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