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Find Stocks With Relative Strength - Sell OTM Bullish Put Spreads

Posted by Pete Stolcers on October 1

Posted 9:30 AM ET – The market has been able to find support at the breakout and the bid should be strong heading into earnings season. The political news has generally been good and the economic news this week should be market friendly. My bias is slightly bullish and I like selling out of the money put spreads (bullish put spreads). Look for quiet trading with an upward bias.

US/China trade talks will resume in 10 days. China’s official PMI was slightly better than expected. Their market is closed today for a holiday and that will have an impact on our volume.

Japan had its worst bond auction in three years and yields rose. This is nothing to worry about yet, but it’s always important to watch credit conditions. Japan’s unemployment rate is 2.2% (the lowest level in 26 years). Rumor has it a US/Japan trade deal is close.

Boris Johnson will take another stab at an exit agreement with the EU and he hopes to have it approved by October 18th. He still feels that a hard exit will happen on Halloween if an agreement can’t be reached. This would violate a law passed by Parliament.

ISM manufacturing will be released 30 minutes after the open today. Tomorrow we will get ADP and employment conditions in the private sector have been strong. I feel ADP is more reliable than the jobs report. ISM services and the Unemployment Report will be released Friday.

Earnings season will begin shortly and that typically attracts buyers. I have not seen many pre-announcement warnings and that is a good sign.

Swing traders bought a half position of SPY at $296.40 an hour after the open yesterday. I like our entry point and I believe the market continue to grind higher. Use a closing stop of $294 and set a target of $302.40. I’m not bullish enough to add the second leg at this time. I prefer to sell out of the money bullish put spreads on stocks with relative strength. Sell below technical support and buy the spread back if that support is violated. The market volume has been low and we are likely to spend time in this trading range. This options trading strategy allows us to distance ourselves from the action and to generate income from time decay.

Day traders should make sure the early rally holds. Support is typically tested on opening gaps higher. During the dip/compression, look for stocks with relative strength. Once support is established, trade from the long side. Support is at SPY $294 and $296. Resistance is at $298 and $300.

The volume and activity should pick up after today.
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