Follow Us: TwitterFacebookRSS feed

Sellers Boycott - Ride the Wave - Know That These Gains Can Be Erased Quickly

Posted by Pete Stolcers on November 7

Posted 9:30 AM ET – The trading volume has been incredibly light during this rally. Yesterday we filled in the gap from Tuesday and we will challenge the high from that day this morning. The S&P 500 is up 12 points on positive news from US/China trade negotiations. We are in a light news cycle and that favors the upward momentum.

Trade negotiations with China are moving in the right direction. There aren’t any details, but a gradual reduction in tariffs is being discussed. Trump has not been fanning the flames so market uncertainty has declined in the last month.

Central bank easing has pushed rates down to historically low levels. Bond yields are not keeping pace with inflation and fixed income investments are generating negative real returns. Corporations are issuing debt at a very low cost and they are using the proceeds to repurchase shares. This is keeping a bid to the market and investors are forced to buy equities to generate a reasonable return.

Earnings season has been better than feared and guidance has been good.

Asset Managers are not worried that they will miss a year-end rally when stocks are trading at the upper end of their valuation range (forward P/E of 17). The Fed is not likely to cut rates in the near future and that safety net is gone.

Gaps higher overnight and compressed daily ranges describe the recent rally. We can expect a gradual move upward on light volume. The first whiff of bad news will flush out bullish speculators and we are likely to test SPY $302 that same day.

Swing traders are long a half position of SPY. Set your target at $310 and your stop at $305 on a closing basis. During the last month we have been selling out of the money bullish put spreads and that is the perfect strategy for this environment. Option Stalker searches like “PopBull” and “Strong After Earnings” have produced excellent candidates. The short strike price needs to be below major technical support and that is our stop. Stocks have moved higher and these bullish put spreads will be trading for pennies next week. Monday is a banking holiday and the volume will be extremely light. Our bullish put spreads will be easy to manage since they are far out of the money. Once they expire we will be in cash waiting for a dip. Option implied volatilities have collapsed and we don’t want to add new bullish put spreads at this level. We have to go too close to the money to generate a decent credit and the risk is greater than the reward. All it will take is one bad day in the market to create problems Draw a downward sloping trend line on a daily chart of the VXX. When it starts to move higher the alert will be triggered and that is when you should look for a market pullback. Ride this wave and manage profits.

Day trading has been extremely difficult with compressed intraday ranges. As I’ve been outlining in my daily comments, look for stocks with volume spikes. Without a market tailwind the stock has to do it all on its own. I am using Option Stalker post-earnings searches. The Heavy Buying/Heavy Selling searches are also excellent and these stocks have liquid options. In your Option Stalker custom searches make sure you are using the 5-minute and 15-minute volume spike variable and all of your searches. Heavy volume typically produces sustained moves.

Look for a move higher today and a compressed range after the first hour. I believe the volume will be light.

I will not be posting market comments Friday.
.
.
image

Get Today's Options Trades Here
OneOption conducts extensive option trading research and it provides specific options trading entry and exit instructions. Select from a spectrum of options trading strategies and find a service that is just right for you. Hedge funds, professional traders and active investors count on OneOption for solid research.

Stock Option Trading Education