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Focus On Earnings Day Trades - Reduce Swing Trades Into FOMC Next Week

Posted by Pete Stolcers on October 25

Posted 9:30 AM ET – The market continues to look for a catalyst and earnings are not attracting buyers. Results to date have been better than feared, but stocks are at the upper end of their valuation range so good news is priced in. Traders are expecting a quarter-point rate cut during the FOMC meeting next week and the market bid should remain strong until then. Shorts are typically passive until mega cap tech stocks have reported and Apple is the last to post (October 30th). Look for lackluster trading with a slight upward bias.

High level trade talks between the US and China will resume by phone today. Both sides are working towards a truce where China agrees to buy more agricultural products and the US delays future tariffs. This would remove market uncertainty and investors have been fearful that the trade disputes could escalate.

Boris Johnson is calling for an election in November. He could either gain support for his Brexit plan or lose it. This week Parliament approved his plan by a narrow margin and he wants to move forward while he still has the votes. The developments this week were market friendly and England finally agreed to a deal.

Weak global economic conditions are starting to impact domestic activity. Next week’s calendar is packed with major economic releases.

The FOMC statement on Wednesday will be critical. I believe the Fed will cut rates, but the guidance will be more hawkish than investors would like. This could spark selling after the statement.

Earnings season is ramping up. Microsoft was flat after good results. Yesterday Amazon reported and the stock is down 6% overnight. Intel posted solid results and it is up 3% this morning. If the market can’t get any lift from earnings the resistance will build near the all-time high.

Swing traders should hold off on new bullish put spreads. Manage current positions and wait for the FOMC statement next week. Time decay should be working in your favor and you need to manage profits. As long as the SPY stays above minor support at $297 I’m not too concerned about the market. We can’t get more aggressive with our longs until we have a market pullback. The trading volume has been horrible during the last leg of this rally and that is a warning sign. If you are selling weekly out of the money bullish put spreads after strong earnings reports you have an opportunity to evaluate the market each week.

Day traders should focus on stocks with heavy volume. There is no market tailwind. Stocks have to do all of the heavy lifting on their own. Focus on earnings reports and technical patterns. I look for stocks that gap higher through major resistance levels. I want to see to long green bars at the start of the day with the close of each bar near its high. That pattern tells me the stock has more room to run and I try to join the move as soon as possible. I use the opposite for bearish trades. I’m not very concerned about the market because it’s chopping around during the day and the probability of a sustained directional move is low. Once I’m into a trade I use the diagonal alert lines in Option Stalker to manage the trade. If I am long, I connect the lows to form an uptrend. As the stock moves higher the alert line follows it. When the stock breaches the trend line I exit the trade. This tactic removes emotion and it allows me to look for new trades.

The S&P 500 is down four points before the open and we are likely to test the downside for the first hour. Support is at SPY $297 and resistance is at $301. Look for another quiet day.
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