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No Trade War Threat - Trump Is Running On A Strong Market [Use This Options Strategy]

Posted by Pete Stolcers on June 23

Posted 9:30 AM ET – The market has successfully confirmed support at the 200-day moving average and is likely to trade in a range while we wait for earnings season. Buyers are typically engaged ahead of the announcements and I am expecting a slight upward bias. We still don’t know the bottom line damage from the shutdown and we don’t know if consumer behavior will be impacted by the latest spike in new cases. We are in a news vacuum and the SPY should stay between $297 and $322 for the next few weeks.

The overnight price action in S&P 500 futures was exciting and comments from Peter Navarro spooked buyers. His statement was misconstrued and it sounded like US/China trade relations were strained. President Trump has done everything he can to prop up the market and he won’t do anything to jeopardize that heading into the November election. No matter what you hear, if the policy rumors are bad for the market they are not true. One of Trump’s re-election battle cries has been the strength of the market since he took office and the 401(k)/IRA wealth that is been created.

We can expect unprecedented money printing from the Fed and we can expect government stimulus (infrastructure bill, unemployment benefit extensions and small business loans) through the election. Democrats don’t want to look like the bad guys so they will also support these policies.

The spike in Coronavirus cases is largely due to increased testing. The percentage of infections is stable around 6.5%. This “spike in new cases” has dominated the national news and people are cautious (in most instances). Social distancing and facemasks will help to contain the spread and this practice needs to continue. This resilient virus will curb consumer spending and that is likely to prolong the economic recovery. Consumer spending is the missing puzzle piece and we should have more clarity in a month.

We are in a news vacuum and the trading volume will be light. This is typically a slow time of year and it is referred to as the “summer doldrums”.

Swing traders should remain in cash and they should be ready to sell out of the money bullish put spreads on strong stocks when we get a market dip. These pullbacks won’t last long and you need to act quickly. Yesterday I posted a YouTube video and I like selling the WMT July (02) $117/116 bullish put spread for $.15 credit. The stock is above the major moving averages and it has broken the downtrend line on a daily basis. WMT has benefited from the Coronavirus because it was deemed essential and WMT was able to keep stores open. Online sales have also been robust. I also like that the stock has not gone parabolic. Even if the virus gains momentum I believe this stock will be able to hold major support. Option implied volatilities are generally elevated (all stocks) and I like selling out of the money bullish put spreads. Market support has been confirmed and SPY $300 will hold. Don’t chase stocks, wait for pullbacks. I would favor bullish put spreads on tech stocks since the sector has been leading the rally. Avoid the laggards.
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CLICK HERE TO WATCH THE VIDEO

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Day traders need to be careful on opening gaps higher. This surge makes it very difficult for us to find relative strength and this price pattern has been the most difficult to trade. One of three scenarios will play out. If the market slips below the opening price in the first 30 minutes of trading we have to be careful of a gap reversal. In this instance we will fill in the gap like we did Friday. If the market is able to hold the early gains for the first 45 minutes of trading this threat is not likely to materialize. The second scenario is a stable open and a first hour range that remains intact the entire day. Most of the gains from the early gap will be preserved and we will test both ends of the range during the day. If this happens we need to lean heavily on the 1OP indicator. It will tell us when to get long and when to be short during the day. The final scenario is that the market gradually floats higher. This is the most difficult trading pattern since the move tends to be very compressed. We don’t want to chase stocks that fly higher out of the gate so we have to wait to see if there is a pullback. All the while, the market continues to grind higher. Eventually it will hit resistance and compress the rest of the day. In this scenario there is a chance for a late day dip and a rally to a new high late in the day. This late afternoon dip is the best opportunity to make money if it plays out. I view this as a low probability trading environment and the opening gap higher makes it even more difficult. I suggest reducing your size and your trade count. We will know which of these scenarios plays out in the first hour of trading and then we will trade accordingly.

SPY support is at $307 and resistances at $315.
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