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Sell SPY Short At This Level - Market Still Has Some Upside But Resistance Building

Posted by Pete Stolcers on April 27

Posted 9:30 AM ET – In the last two weeks the market momentum has slowed. Asset Managers are waiting for clarity and the S&P 500 rests halfway between the all-time high and the three year low. Major economic releases and mega cap tech earnings announcements are scheduled this week. I still believe that the S&P 500 has a little more upside before it runs out of gas.

States are preparing to reopen their economies and that is fueling the move this morning. Alaska, Georgia, South Carolina, Tennessee and Texas will allow restaurants and other establishments to reopen. I believe that consumers will still be very cautious and that social distancing rules will make it difficult (if not impossible) for restaurants to make money. Fixed overhead expenses are extremely high and profit margins are razor thin. High-volume is essential to making money in restaurants.

New York Governor Cuomo has outlined the first phase of their reopening and it will involve construction and manufacturing sectors.

This shutdown can’t drag on or credit issues will surface. Missing from the headlines this morning are states like Illinois, Michigan and Wisconsin. These states recently extended their coronavirus shutdowns.

Everyone expected that the spread of the Coronavirus would decline towards the end of April and that the shutdowns would end eventually. This is a “relief rally” and there is little substance behind the move. We don’t know the extent of the economic damage and we don’t know if $6 trillion in stimulus spending will be enough to kick-start the economy.

Q1 GDP, the FOMC statement, Chicago PMI, ISM manufacturing and official PMIs from around the world will be released this week. These numbers are backwards looking and I question their reliability. Many agencies have been shut down during the crisis and data has been very difficult to gather.

This will be a big week for earnings releases and they include tech giants like Apple, Amazon, Facebook, Microsoft and Google. With the exception of Apple, I believe that these companies have been spared by the virus and in some cases they have prospered because of it. This should spark additional buying and the SPY could rise above resistance at $288. I don’t feel that mega cap tech companies are representative of the entire market. The future is uncertain and many CEOs are pulling guidance because they don’t know what lies ahead. Healthcare and tech sectors have been strong. Financials, basic materials, real estate, retail, industrials and service sectors have been week.

Swing traders should place an order to short a 1/2 position of SPY at $288. I believe that the “air will be let out of the balloon” after tech companies report. Be prepared to sell out of the money bearish call spreads and out of the money bullish put spreads based on post-earnings reactions. Option Stalker will help us find these trades.

Day traders should be prepared for relatively tight intraday ranges. The market momentum is starting to stall and we are likely to see two-sided action. I still favor trading from the long side and I find that price action to be much more consistent and predictable. I don’t see any major news to justify the early rally so wait for the bid to be tested this morning. As that happens look for stocks with relative strength. When market support has been established, buy these stocks and set passive targets. When the market rebounds, take profits and go to cash. The majority of our money is made in the first two hours of trading. Wait patiently to see if we get another afternoon window. I am trading half of my normal size in the afternoon session and I am reducing my trade count.

Look for one more market push higher this week. Major resistance is at SPY $288 and $300. Major support is at $272 and $262.50.
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