Dips Remain Buying Oportunities, But Wait

Options week volatility is a bit exaggerated this month as indices continue to be overbought. Yesterday was more of a buyer's strike than it was a sell off. Profits on the table after the recent run up can disappear quickly even in a minor pullback so there was a bit of panic profit taking yesterday afternoon. The area to keep an eye on here is the semiconductors, which have been one of the main market leaders in the recent rally. The SMH reversed sharply yesterday and the closing price left a fairly strong near term sell signal. As you can see, the QQQQ is still well above its breakout point and maximum pain for call buyers is $40. The intraday reversal on the QQQQ yesterday strengthens the chances of options sellers to get the QQQQ down to maximum pain by Friday where they will realize the most profit on their contracts. Such a pullback would be healthy as we believe buyers who missed the breakout are waiting back at the $40 area for a second chance to participate in this rally.

There is little doubt that the market is going to pull back here. We believe that the best position to take during this pullback is a defensive one. There are possibly some positions that are shortable, but risk of surprise generally occurs in the direction of the trend. Since the trend is up, risk on the short side is not manageable for all but the most nimble of traders. After market shocks might be the biggest reason for avoiding short positions at this point.

We may suffer some stop outs as a result of yesterday's hard reversal. Respect the pullback and honor stops here. Buying opportunities are sure to arise out of this pullback, but the next few days are the time to preserve your trading account, not hold and hope.