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Time To Sell Bullish Put Spreads - Market Ready For Rate Hike

Posted by Pete Stolcers on June 13

Posted 9:30 AM ET – Yesterday we saw some follow-through selling, but prices stabilized. Stocks will open higher this morning and investors will take a deep breath. Fed will hike rates tomorrow and the market is prepared.

It is typical for the S&P 500 to decline ahead of an FOMC meeting. Once the statement is released stocks rally. I believe the Fed will soften the blow with dovish rhetoric about the next rate hike. The market will shoulder this round of tightening and buyers will return.

Tech stocks were over-extended and bullish speculators were shaken out. We’ve seen one day declines in the QQQ recently and in each case those moves quickly reversed. I’m expecting the same this time around.

China will post industrial production and retail sales tomorrow morning. I’m expecting soft numbers and this will keep a lid on any pre-Fed rally.

Quadruple witching is Friday and that will add volatility.

Swing traders should be ready to sell out of the money bullish put spreads after tomorrow’s statement. Tech stocks have been beaten down and option implied volatilities are rich. Find stocks that have strong technical support and sell out of the money bullish put spreads. Make sure the short strike price is below technical support. If that support is breached buy back the spread. This might be your best opportunity to generate income in the next month so don’t delay. The summer doldrums will set in and the market will fall into a tight trading range. Volume will also decline in coming weeks as the news dries up.

Day traders should try to take advantage of this bounce early today. I believe stocks will firm up and tech will perform well. After the first few hours of trading the action will dry up and we will be “dead till the Fed”. There will be some nice opportunities Thursday and Friday and trading volume should be brisk.

The market will chop around this summer. If politicians make progress on health care and tax cuts (unlikely) the market will grind higher. If not, investors will grow impatient and we will see a decline in August.

Look for a small bounce today and a rally after the Fed rate hike on Wednesday.
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