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Posted by Pete Stolcers on October 10

Posted 9:30 AM ET – The market is inching higher at a snail’s pace. Seasonal strength will kick in and earnings season is about to start. We are due for a swift pullback of 20-30 S&P points and it is likely to be a one-day event. Bullish speculators need to get flushed out.

Gains that have taken weeks to materialize will be gone in an instant. This sounds horrible, but the S&P has only rallied 50 points since July. The damage will feel much worse than it is.

Stocks are over-extended and we need that drop. Once we have it the market will slingshot to a new all-time high.

This event will come quickly and it doesn’t necessarily have to be a news event. A gap higher (like today) with an immediate reversal could be all it takes. Once the selling momentum is established, buyers pull bids. Asset Managers are not overly eager to buy stocks at an all-time high. They will gauge the selling pressure and bullish speculators will exit. When support is established buyers will start bidding again and the next leg of the rally will begin.

Banks have run hard and they are due for a pullback. J.P. Morgan chase and Citigroup will announce earnings Thursday.

Trump is “stirring the pot” and it will be difficult for him to strike a tax deal before year-end. Democrats have leverage because the debt ceiling needs to be renegotiated in December.

The FOMC minutes will be posted tomorrow and we can expect hawkish rhetoric.

North Korea has been relatively quiet, but missile testing could resume at any time.

If my comments sound bearish, let me temper my tone. There are enough “dark clouds” to spark a round of selling that lasts a day or two. Any of these issues can be used to justify the market drop. In reality, the selling is just a normal adjustment after a good run.

I am still bullish and I believe the market will grind higher into year-end. I have taken profits on call positions and I am still long. I will take profits and exit positions on strength. It looks like we will have a nice rally today and I will be scaling out. When I am back in a cash position I will wait for the drop.

As a swing trader you need to evaluate your risk tolerance. If your options are expiring in November and December you can probably weather the speed bump. If you are long October calls, you need to take advantage of this rally and lock in profits. As a shorter-term trader, I will exit and wait for a better reentry point.

Day trading has been tough. The market tends to gap overnight and stall in a tight trading range. Try to find a few good trades. Let the market come in and then buy. I don’t like trading up opens here so I will be quiet today (unless we get a reversal, then I will short).

Be careful on the early rally this morning. If it reverses hard in the first hour this could be the start of the drop.

Try to take some money off the table today.
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