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Here Is A Bullish Put Spread and Bearish Call Spread For Today. Look For This Pattern

Posted by Pete Stolcers on November 15

Posted 9:30 AM ET – The market continues to inch higher in a light news environment. Positive trade comments from economic advisor Larry Kudlow are fueling a pre-open rally. US/Chinese trade negotiators are having daily dialogue and the Phase 1 deal is down to the “short strokes”.

The truce with China won’t have much of an economic impact, but it will relieve tension and reduce uncertainty.

A bigger overnight development is the USMCA. Nancy Pelosi said that they are close to signing a deal and that it could provide a template for other trade agreements. Democrats have been fighting Trump the whole way and this trade agreement has been ready to go for months. USMCA will have a much greater impact on economic activity than a truce with China.

Brexit is a nonissue until the December 12th election.

Fed chairman Powell did not shed any new light during his congressional testimony this week. Economic conditions are stable and political risks have decreased. Fed officials are content with current policy and there will not be another rate cut this year.

The economic calendar is light for the next week and conditions are stable.

Earnings season is winding down and 75% of the S&P 500 companies exceeded earnings expectations. Guidance was good and stocks can tread water at the upper end of their valuation range as long as there are not any surprises.

Swing traders should be almost 100% in cash. We took profits on our SPY position and we have been buying back our bullish put spreads for pennies. We need a market pullback so that we can reload. Option premiums have collapsed and we have to go too close to the money to generate a decent credit. One little market stumble and they will be in the money. In this week’s swing trading video I highlighted bullish put spreads and bearish call spreads. I am using Option Stalker searches to find stocks with these characteristics. On the bullish side I want to see a stock that is rallying from a base and that ideally has a higher low. Once the stock rallies through resistance (major moving average or horizontal) I use that as my support level and the short strike price is below it. The searches also look for relative strength and heavy volume. In these instances I don’t mind selling bullish put spreads that are close to the money because I’m expecting the stock to tread water or move higher. This strategy allows me to take a neutral to slightly bullish position in the stock. BA is a good example. For my bearish call spreads I am using Option Stalker to find stocks with relative weakness. In particular I’m looking for failed breakouts where the stock rallied above resistance and where the stock has fallen back below it. I want to see relative weakness, heavy volume and tails above body of the recent high. I am selling bearish call spreads above that resistance level. FDX is a good example. Since the market is moving higher I would use a ratio of two bullish put spreads to every bearish call spread.

Day traders should favor the long side. Option Stalker searches like Heavy Buying, Relative Strength 30 and 4-Bar Breakout are all I need. In the first few minutes of trading I have my candidates and I highlight them in my daily YouTube videos. The intraday price action has been unpredictable. Some days we compress and other days we have good volatility. The constant is that trading volume is low. On days where we get good price movement, look for bullish hammers at the low and inverted hammers at the high. Once the move is exhausted you can expect a reversal. I use those to time my entry and exit for long positions.

We should see a nice push higher this morning. Watch for long tails above body on the SPY. That will be a sign that the market will probe for support. Don’t expect a runaway rally. Temper your excitement on the open. We should see a gradual drift higher during the next week and this light volume rally is vulnerable to a “nasty day”. My overnights will be pretty minimal until we get a market pullback.
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