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Here Is the Timeline and Possible Range For A Blow-off Market Rally

Posted by Pete Stolcers on January 13

Posted 9:30 AM ET – The market narrative has not changed overnight. Buyers are engaged ahead of earnings season and the market is flirting with the breakout through the upper end of a trading channel that started in November. Negative news is being ignored and the focus is on a vaccine related economic rebound. Until then, money printing is expected to support the economy.

I believe that the market could stage a breakout through the upper end of the trading range and that FOMO (fear of missing out) could spark buying. Bullish speculation is extremely high and option volatilities are near historic lows. Banks will be hard-pressed to rally in this environment after running hard the last month. They will dominate earnings releases next week and I don’t believe financials will continue higher. On the other hand, tech giants have benefited from the virus and those earnings could be fairly strong. Profit-taking will be marginal until they have reported.

I believe that a breakout through the upper end of the trading channel could reach SPY $390 and perhaps even $400. A move of that magnitude would be a buying climax and I would expect to see a swift round of profit-taking if this scenario plays out.

Perfection is priced in and stocks are rich at a P/E over 40. The Coronavirus continues to spread quickly and Europe is struggling with the new mutation. Analysts agree that vaccines won’t have a material impact in the first half of 2021. This timetable makes a fast economic rebound unlikely in Q1. Last week we saw that job losses are on the rise.

The $2000 stimulus checks represent an additional $500 billion to the $900 billion bill that was passed. This liquidity injection and the potential for strong tech earnings should lead to a blow-off rally. The price action this week has been relatively soft and I don’t believe that bank earnings will spark buying. The low from Friday was tested yesterday and it will be tested again this morning. Once support is established, buyers will regain confidence.

Swing traders who can’t watch the market during the day should passively sell out of the money bullish put spreads. We have four positions on at this time and we will try to add two more this evening when I record my Weekly Swing Trading Video. I will be focusing on stocks that have a history of rallying into earnings announcements when they are inside of a two week window. As always we will lean on technical support and we will sell put spreads that expire in three weeks or less so we can take advantage of accelerated time premium decay. Stock selection is critically important given the market backdrop I have outlined.

Day traders should watch for support at SPY $377. That was a low from Friday and it was tested yesterday. We saw a nice bounce off of that level and I’m expecting it to hold today. Down opens give us an opportunity to quickly find relative strength. Line up your stocks and wait for market support. I still prefer to trade from the long side and we are focusing on stocks with heavy volume relative strength. When the market does show signs of weakness I prefer to short the S&P 500 futures because I can quickly exit the position. The snap back rallies are fast and furious and I do not want short exposure across a number of stocks. We’ve seen nice intraday ranges so stay fluid. Use the 1OP indicator on a five minute basis for the SPY as your guide. The more times we test SPY $377 stronger that support level becomes. Eventually it will be a springboard for the final leg higher. If by chance the market breaks that support level after two hours of trading, favor the short side.

Support is at SPY $377 and resistance is at the all-time.
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