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Market Is Strong - It’s Time To Buy [Use This Options Trading Strategy]

Posted by Pete Stolcers on February 5

Posted 9:30 AM ET – Yesterday the S&P 500 gapped higher and it was able to hold the gains. Monetary easing by the PBOC eased investor concerns. This morning we learned that China may have found a treatment for the Coronavirus and this would be a huge development. ADP reported strong job growth in the private sector during the month of January. The S&P 500 is up 25 points before the open and it looks like we’ll have another strong day.

China’s oil demand has dropped 20% since the outbreak and travel is down 70% during its biggest holiday of the year. Coronavirus will have a dramatic economic impact and Q1 GDP could drop by 2% or more. There are now 25,000 cases of Coronavirus. Hopefully Zhejiang University has found an effective cure. The impact of Coronavirus will be temporary and that is what investors are focusing on.

This morning ADP reported that 291,000 new jobs were created in the private sector during the month of January. That is an incredibly “hot” number and it bodes well for Friday’s jobs report. ISM manufacturing was better-than-expected on Monday and the official PMI’s from Europe have been revised slightly higher. After the open today we will get ISM services. That will be a very important number since 80% of our economic activity comes from the service sector. As a survey it tends to be forward looking so it carries a lot of weight.

President Trump’s State of the Union Address was triumphant and today he will be acquitted by the Senate for impeachment charges. This has not had much of a market impact and this outcome was expected.

Swing traders should buy the SPY one hour after the open when it makes a new high for the day. That means you don’t do anything for the first hour and you only buy if we eclipse that high. I want to use the strategy just in case the market pulls back after the open. If this happens the market will have to rally to make a new high. I thought we might see more selling over the next week or two and I felt that bullish speculators could be squeezed. The S&P 500 tested support twice and bounced off of it. That might be all we get on the downside. I also suggest selling out of the money bullish put spreads on strong stocks. Be progressive and adding 50% exposure. That would leave us with 25% left to allocate and we will add next week. During a time when we could’ve easily seen a “shakeout” the market showed incredible resilience. I still feel that stocks need to grow into their current valuations and I believe that resistance at the all-time high will be fairly stiff. We should still see sideways movement while these market gains are digested and while the impact of the Coronavirus is determined. I have been hedging by bullish put spreads with VXX and I will remove that hedge this morning. Tonight I will post my weekly swing trading video and I will have at least 6 new picks.

Day traders need to watch the open. We could see a very similar pattern to the one we had yesterday. We gapped higher, compressed and then gradually floated upward. The price action was fairly dull after the initial move and we saw little late day selling. If we don’t get a series of long red candles closing on their low or a series of long green candles closing on their high in the first half hour of trading we will spend time trying to find a direction. The longer these early gains hold, the more likely we are to see an upside breakout.

A possible cure for the Coronavirus, prompt easing by the PBOC and a strong round of global economic releases influenced my market bias. I was neutral to slightly bearish and now I am fairly bullish. The soft patch gave me an opportunity to gauge the market bid and it is very strong.

Look for a gradual move higher and a possible test of the all-time high in the next two weeks.
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