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Take Gains On SPY - We Will Error On the Side of Caution - Bullish Put Spreads Still Good

Posted by Pete Stolcers on February 7

Posted 9:30 AM ET – Yesterday the market closed at a new all-time high and the action was lackluster. Stocks have moved dramatically higher in the last week and we will give Thursday’s gains back on the open this morning. Coronavirus is still making headlines and investors are nervous. In the last few weeks we’ve seen selling on Friday and we will see if an excellent jobs report can attract buyers.

The Coronavirus is spreading and there were 31,000 confirmed cases. That is up 11% overnight and the growth rate has slowed a little. The death toll is at 636 and that is a 13% increase in the last day. Economists are revising China’s 2020 GDP growth down from 5.7% to 5%. This was an untimely event given that the Chinese lunar New Year was just beginning during the outbreak. This will get worse before it gets better and some scientists believe that it will peak in one month. China has postponed its January trade data and it will combine it with February’s figures.

Domestic economic growth remains very strong. This morning the Unemployment Report showed the 225,000 new jobs were added in January and that is much better than the 160,000 that were expected. ISM manufacturing, ISM services and ADP were all excellent this week.

Earnings season climaxed last week and mega cap tech stocks have reported. Typically the “air gets let out of the balloon” after they report, but that didn’t happen this week. Asset Managers gobbled up shares of stock and they saw the recent market dip as a buying opportunity.

Swing traders should sell SPY on the open today. You should be able to breakeven on this trade and I want to error on the side of caution.

I believe the market breakout that we had this week will struggle to hold its own and that Coronavirus will spook investors. We patiently waited for a buying opportunity and stocks raced higher before we could take action. I believe that the long-term macro back drop is intact, but I don’t like our entry point. I still like selling bullish out of the money put spreads, but I suggest owning some VXX as protection. I don’t trust communist China and they are likely under reporting the impact of the virus. They may not have released the trade data today because it was incredibly weak. At a forward P/E of 18, stocks are priced for perfection and this event could spark selling. I believe we will have a second chance to enter at a better price. Selling out of the money bullish put spreads on strong stocks still makes sense. We have technical support to lean on for those stocks and they have relative strength. They also have strong earnings to support the current stock price. Time decay will work in our favor each day and we will use VXX to protect us. I suggest taking the total dollar margin requirement for all of you put spreads and dividing it by the price of VXX to calculate how many shares you should buy. If the market treads water for a few weeks you will make money on your spreads and VXX should only move a little lower.

Day traders should be prepared for balanced price action today. We are likely to see nice trading within a fairly wide range. If there are consecutive long candles in either direction in the first 30 minutes, use that as your guide especially if they are stacked on top of each other. I believe we will have a pretty choppy day with a negative bias into the weekend. Support is at $332.40 on the SPY. Resistance is at $334.45
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