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Market Bid Remains Strong - Build Your Wish List [Options Game Plan]

Posted by Pete Stolcers on February 4

Posted 9:30 AM ET – PRE-OPEN MARKET COMMENTS TUESDAY – This morning the market is going to race right back to resistance at SPY $328. There hasn’t been any improvement on the Coronavirus front and I expected news of a cure when I turned my computer on this morning. Google is down after reporting earnings. This overnight jump seems related to easing by the PBOC. I feel the move is vulnerable, but it does demonstrate that the bid is still strong.

Coronavirus continues to spread and there are 20,000 cases. Over 425 people have died from the virus and the death rate is around 2% (much higher than the flu .13%). China’s domestic travel is down over 70% during the busiest time of year and oil demand has plunged 20% since the outbreak. Analysts feel that the Coronavirus could lower economic activity in China by 2% in Q1. Mindful of the impact, the PBOC injected $500 billion of liquidity into the banking system and that might explain some of the rally this morning.

Google dropped 4% after reporting earnings and it is the last of the tech giants to announce. The selling pressure typically increases after mega cap tech earnings. Amazon, Apple, Facebook, Google and Microsoft account for 18% of the S&P 500. Traders and Asset Managers will be more inclined to take profits now that these giants have reported. The back-half earnings season tends to be lackluster. At a forward P/E of 18, the market will do well to tread water for a couple of months. Stocks need time to grow into current valuations.

Tonight President Trump will deliver his State of the Union Address. I’m expecting an upbeat tone and he will focus on strong economic growth and full employment. Tomorrow the Senate will vote to acquit him on the impeachment charges. I don’t believe this will have a material market impact.

There will be significant economic releases this week. Yesterday, ISM manufacturing was much better than expected and it rose above the expansion level for the first time in a few months. This is a survey and it is forward-looking. ADP will be released tomorrow along with ISM services. Both are important numbers. Domestic economic growth has been stable and trade deals could add 1% to GDP growth this year.

I like the market and I believe that it wants to move higher. However, I still feel that bullish speculators need to be flushed out so I am reluctant to join the rally this morning. If the gains hold and we start to see signs of support, I will start selling out of the money bullish put spreads on strong stocks. I still feel that the Coronavirus is being discounted. The economic impact will be temporary, but it will be significant. Swing traders should remain patient for a few more days.

Day traders should watch the early price action. The bid will be tested early. If we see steady selling early in the day, most of the gains could be given back. If the market is able to hold the gains it will mean that the bid is extremely strong and that we need to trade from the long side. Watch for long green candles closing on their high or long red candles closing on their low in the first half an hour of trading. They need to be consecutive and they need to stack one on top of the other. If you see that, follow the direction. If you don’t see that and the candles are small or mixed, we are likely to trade in a range during the day. Let’s see how the day plays out. This is a nice move on the open and I’m hoping for a nice range today.

Regardless of what the market does today, you should be working on your wish list. We want to sell bullish out of the money put spreads on strong stocks that have reported excellent earnings. I would not chase this rally. We will have an opportunity to get in. Let’s make sure that the gains hold.
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