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Swing Traders Should Use This Option Strategy Now!

Posted by Pete Stolcers on September 30

Posted 9:30 AM ET – Last week the market tested the breakout at SPY $294. That support level is held and I believe this is the buying opportunity we’ve been waiting for. I favor selling out of the money bullish put spreads on stocks with relative strength. The news will be steady this week and trading volume should return to normal levels.

The US and China will resume trade talks in 10 days. There have been a few good faith gestures in the last two weeks and both sides want to keep investors calm.

A trade deal with Japan seems likely. Both sides are hashing out minor details.

England’s Finance Minister said that the country will leave the EU with or without a deal on October 31st. I’m not sure how they will make that happen when Parliament ruled that it would be unlawful for England to leave without a deal.

China’s manufacturing PMI improved slightly to 49.8 from 49.5 in August. The Caixin Manufacturing PMI rose to 51.4 in September from 50.4. These numbers are still soft, but they improved so they are market friendly.

This week’s domestic releases include; Chicago PMI, ISM manufacturing, ADP, ISM services and the Unemployment Report. Domestic activity has been good and the numbers should reflect that. As long as economic weakness stays abroad investors will buy stocks.

Global bond yields are at historic lows and fixed income investments don’t keep pace with inflation (investors lose purchasing power). Monetary easing provides a safety net for the market because investors are forced into equities.

Earnings season will begin in a week and pre-announcement warnings have been minimal. Stocks are trading at the upper end of their valuation range and good news is priced in.

Swing traders should buy a half position of SPY one hour after the open. The bid will be tested and $294 should hold. Our stop is a close below $292 (100-day MA). I particularly like selling out of the money bullish put spreads on stocks with relative strength. We will add the second half of our position when support at this breakout has been confirmed.

Day traders should look to buy dips today. After the selling Friday we should probe for support early. I will patiently wait for a compression on the low of the day or a higher low. Use the first hour to find relative strength. If the market makes a new low after two hours of trading and it breaches $294 (unlikely), favor the short side. The volume has been light on Monday’s so expect lackluster trading today.

Earnings season typically attracts buyers. I believe the bid will strengthen this week on solid economic releases.
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