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Market Headwind During Bullish Period Could Be A Warning

Posted by Pete Stolcers on April 20

Posted 9:30 AM ET – The market is fighting a stiff headwind. Typically stocks rally as earning season begins. Yesterday stocks rallied on the open and they drifted lower the rest of the day. The price action was bearish and I don’t trust the early rally this morning.

Earnings season is in full bloom and in general the overnight releases were bullish. “The Street” loves profits, but the political backdrop has prompted profit-taking.

Trump is rattling the sabers with North Korea, Russia and Iran. He seems to be gaining support globally. China has sent troops to North Korea and European nations are beefing up their defense spending. Iran continues to pester our battleships and the nuclear agreement could be in jeopardy. The geo-political backdrop is dominating the headlines and this has some investors nervous.

The political scene domestically also has some wrinkles. The government will hit the debt ceiling in one week. Republicans are in control and I don’t believe we will see a shutdown. Trump wants to take another shot at a healthcare bill and that will postpone tax reform for many months. Stocks have already priced in tax breaks and investors are growing impatient.

The Fed has an aggressive tightening agenda. Any economic speed bump will create selling pressure. The recent jobs report and ISM services were soft. Yesterday the Beige Book showed solid growth across all regions. Flash PMI’s will be posted tomorrow and I’m expecting good numbers.

I’m still expecting the market to tread water the rest of the month. If support at SPY $231 is breached the market is going to decline in May. This would be a sign that sellers are aggressively exiting stocks during a normal period of strength. They want to get out while the bid is still there.

Swing traders should still focus on selling out of the money put credit spreads. Look for stocks that have reacted positively to good earnings announcements. Make sure there is technical support between the stock price and the short strike price. If technical support is breached, buy back the put spread. This strategy allows you to take advantage of time decay and you can distance yourself from the action.

Day traders should not trust the early rally this morning. I mentioned yesterday to use caution and to wait for a pullback. As it turns out the market kept drifting lower. The selling pressure yesterday is a sign of weakness and the downside will be tested this morning. Watch financial stocks. If they are treading water and they want to move higher the market will rally. This sector started off well yesterday and it deteriorated the entire day. Oil stocks also pullback sharply yesterday. Any market rally today will need help from both sectors. If I see this underlying strength I will trade tech stocks from the long side. If financials and energy are weak I will favor the short side.

Support is at SPY $232.50 and resistance is at $235.20.

If the market is going to challenge the 50-day moving average it needs to put in a strong day today. Be patient and buy the dip if energy and financials are flat to higher.
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