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Market Support Will Hold - Wait For Dips and Sell Bullish Put Spreads - Keep It Small

Posted by Pete Stolcers on June 22

Posted 9:30 AM ET – Last Monday the S&P 500 bounced off of the 200-day moving average and we saw follow through when it gapped higher on Tuesday. The market spent the rest of the week filling in that gap from Tuesday. Friday we had a gap reversal. Once the downward momentum was established, quadruple witching sell programs kicked in and stocks closed on their low of the day. I believe that Friday’s selling was program driven and that we are going to see sideways price action for the next few weeks.

Economic releases are light and earnings season is a few weeks away. Investors need clarity. We don’t know how quickly our economy will recover and we don’t know how bad the losses were in Q2.

The media is quick to point out that the number of Coronavirus cases is increasing, but they don’t mention that the testing has been ramped up. On a percentage basis just as many people are contracting the virus and the economic reopening is not promoting the spread. People realize that they need to practice social distancing and that they need to wear facemasks when they are in congested areas. Consumer spending is the key to the recovery. If people are saving (and not spending), the recovery will take longer.

Most CEOs have stated that Q2 earnings will be much worse than Q1. Stocks have rallied considerably from their lows and I believe that valuations are getting a little stretched. That doesn’t mean that we will see a dramatic market decline. As long as investors feel that the recovery is underway, they will stay long and stocks will tread water while they grow into current valuations.

Mortgage defaults are on the rise and the number of borrowers that are more than 30 days late has hit levels that we haven’t seen since 2011. Mortgages that are past due or in foreclosure reached 4.3 million and the increase was 723,000 month-over-month. Credit is something that we need to monitor very closely. We are just now reopening the economy and this should be the trough.

The federal government is providing an additional $600 per week above state unemployment benefits and that will end in July. When this aid is removed it could impact consumer spending. Ideally, the economic recovery is making steady progress by then and removing this stimulus won’t matter.

Europe is preparing for the possibility of a “hard exit” for England. Negotiations are at a standstill and this could be a potential “fly in the ointment” later this year. I’m not overly concerned about it at this stage since these deals usually get signed at the last minute.

Swing traders should be 100% in cash. Last week we closed out our last two bullish put spreads for a maximum profit and we do not currently have any positions. I believe that the market will chop around in a trading range for the next few weeks and that the bid will be stable. Selling out of the money bullish put spreads on strong stocks is still the best strategy. You have to wait patiently for a dip and you have to act quickly when you get one. They won’t last long. I believe that last Friday’s market decline was largely related to quadruple witching sell programs. This morning the S&P 500 will open where it closed Thursday and that effectively wipes out the price action Friday. Be cautious and wait for a dip. This is a low probability trading environment and you should not force trades.

Day traders need to make sure that the bid is strong on the open. If the market trades below the opening price after 30 minutes of trading, the possibility of a gap reversal is fairly high. If this scenario plays out the selling momentum will accelerate and we are likely to fill in the gap this morning. If the market is able to hold the gains during the first hour, we are likely to drift higher. I will be watching for market support and I will be looking for stocks with relative strength. Tech has been leading the charge and if the market holds its bid for the first hour of trading I will be looking to buy strength this morning. In last night’s video I mentioned that Chinese stocks are moving higher and they are worth a look this morning. I plan to set passive targets and I will be trading smaller size.

Support is at SPY $307 and resistances is at $314. We are in the summer doldrums and Mondays tend to be lackluster. Expect relatively quiet trading today.
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