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News Today Removes Uncertainty - Good For the Market

Posted by Pete Stolcers on October 21

Posted 9:30 AM ET – In my comments Friday I mentioned that the Brexit vote on Saturday was important and that the upside reward was greater than the downside risk. Boris Johnson had to delay the exit deadline until January 31st and Parliament will try to pass laws that would make the provisions in the agreement possible. Once that is done England will try to formalize the agreement. This news removes a lot of uncertainty for the rest of the year and the S&P 500 is up 13 points before the open.

Trade negotiations with China are positive for the time being and that’s all the market needs. China’s primary trade negotiator (Liu) said that substantial progress has been made and that China wants to work towards an agreement.

The S&P 500 is within striking distance of an all-time high. Tariffs have been imposed on China and the relationship between both countries is soured. The market might have knee-jerk reactions to trade related news, but each decline is smaller. Both economies remain stable and US consumers have not been impacted. The devaluation of the yuan has offset the tariffs and the US government has raked in billions in tax revenue. As long as the relationship remains status quo the market won’t care if there’s a deal or not.

Domestic economic data points have softened recently. This is primarily due to weakness in Europe. The US exports more than twice as much to Europe as it does to China. The ECB is out of bullets and interest rates are negative. Europe will have to weather this storm without help from the central bank. The Fed is ready to cut interest rates if conditions in the US continue to soften. That is keeping a safety net under the market. The FOMC will meet in 10 days and traders are expecting dovish remarks.

Earnings season will hit full stride this week. The announcements so far have been good and guidance has been decent. Buyers are typically engaged through mega cap tech earnings and AAPL is one of the last to report (October 30th). I’m expecting decent price action the rest of the month.

Swing traders should continue to sell bullish out of the money put spreads. Option Stalker has a number of earnings related searches that we will lean on. One search identifies stocks that have rallied 2 weeks before the earnings announcement more than 75% of the time over the last three years. Sell out of the money bullish put spreads on these stocks below major technical support. Make sure that the spreads expire before the earnings announcement date. Another search we will be focusing on finds strong stocks that have already reported in the last two weeks. We want gaps through horizontal resistance after the number and we want the stock above that gap. This is another Option Stalker search and we will sell bullish put spreads below the gap. Market resistance is fairly strong at the all-time high and the double top formation confirms that. The trading volume is low and that is also problematic. Bullish put spreads allow us to keep a safe distance and to take advantage of time decay.

Day traders should wait for support this morning. The trading volume last week was horrible and that is a sign of low conviction. When the market has challenged the all-time high on light volume we have seen pullbacks. Opening gaps higher are always vulnerable and we need to make sure that this one holds. The news over the weekend was substantial and I believe the bid will be strong today. We’ve seen a lot of doji formations (close equals open) and the market has a tendency to establish a range and to migrate back to the open. Until trading volume returns to normal assume that overextended moves will reverse. Support is at SPY $297 and resistance is at $300. I will be using the Heavy Buying search right on the open. It looks for heavy volume, liquid options and relative strength. These are the stocks that want to run.

I believe the price action will have a bullish bias the rest of the month, but the low volume reveals a lack of conviction. Earnings should be decent and that’s where we will focus our attention. Any dip from now through year-end will be a good buying opportunity and we can get more aggressive with our longs at lower levels.
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