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Market Forecast - Here’s Why You Need To Cut Your Trade Size and Trade Count

Posted by Pete Stolcers on June 24

Posted 9:30 AM ET – The S&P 500 is trapped in a range and investors are waiting for clarity. The broad market hasn’t moved much in the last few weeks and the news cycle is extremely light – welcome to the summer doldrums. Q2 earnings season will start in a few weeks and traders will be gauging the bottom line destruction caused by the shutdown. Consumer spending will be impeded by the recent rise in Coronavirus cases and the economic recovery will be gradual. Look for lackluster trading the next few weeks.

Tech stocks have been surging and the QQQ made a new all-time high yesterday. Amazon, Apple, Facebook, Google and Microsoft have accounted for much of the rally. Traders should focus on these stocks since they have momentum and heavy volume.

There are rumblings of new US tariffs on European goods and this is in response to a digital tax that the EU is proposing. I don’t believe this will go anywhere and the news isn’t having much of a market impact. President Trump is not going to do anything to spook investors (create uncertainty) before the election.

Swing traders are in cash waiting for a market dip. Tonight I will post my Weekly Swing Trading Video and I will highlight four new bullish put spreads. This strategy allows us to distance ourselves from the action and to take advantage of accelerated time premium decay. We want to sell out of the money bullish put spreads that expire in less than three weeks so that we can evaluate market conditions on an ongoing basis. A decline in option implied volatility is likely while the market is stuck in a trading range. That will also favor this options trading strategy. We are looking for stocks with relative strength that have heavy volume and that have broken through horizontal resistance. These characteristics increase our probability of success and we will sell the spreads below major technical support levels. This is a low probability trading environment – tread cautiously.

Day traders should watch for lackluster price action. The market is going to open where it closed Friday and Monday’s gains will be erased. If you find a stock that looks particularly strong, scale and once market support has been established. You won’t have to worry about the “rug” getting pulled out from under you since the market is not likely to move much. Reduce your trade count and your trade size. This is a low probability trading environment and I will be trading half of my normal size in the morning session and 1/4 of my normal size in the afternoon session. Right now my goal is NOT to lose money. I will try to find a handful of good trades and I will set passive targets. I need to stay engaged so that I can identify changing market conditions. There are times when you should “swing for the fence” and times when you should “lay low”. As a trader it’s important to recognize which environment you are in. Forcing trades when market conditions are unfavorable will lead to unnecessary losses and they can dramatically impact your capital base. Don’t force trades.

Look for sideways action. Support is at SPY $307 and resistance is at $315.
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