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Take Profits Into Market Strength and Go To Cash - Trouble In August

Posted by Pete Stolcers on July 15

Posted 9:30 AM ET – Yesterday the market was able to find support and buyers surfaced late in the day. Overnight news of successful clinical trials has investors excited about Moderna’s Coronavirus vaccine. The S&P 500 will open near the high established Monday and resistance at that level will be challenged. Buyers are typically engaged ahead of earnings season and the price action should be bullish for the next two weeks. Use this opportunity to take profits and to reduce your risk exposure. I believe that the market is vulnerable to profit-taking in the back half of August.

There are many promising vaccines that are currently being developed and there is a good chance that they may come to market before the end of the year. The Coronavirus is spreading and many states are stuck in Phase 3. There are also major cities that are considering a complete shutdown. This will dramatically lengthen the economic recovery and credit issues are likely to surface. According to an article in The Hill, 23 million families face eviction in October. Without question, additional stimulus will be needed.

Congress is trying to pass a bill and they are likely to get it done before they go into recess in a few weeks. Democrats want to continue the PPP program that adds $600 per week to unemployment benefits. Republicans want a one-time payment of $1200 per taxpayer. Regardless of which path we take, the next helicopter drop is likely to happen.

A vaccine is critical, but it won’t be available for months (at best). We still have to endure many months of a dismal economic growth and there will be business failures.

Swing traders should limit new bullish put spreads. I believe that we will have a few good weeks before risk is elevated. The decline we saw Monday afternoon was a warning sign and you should start reducing your bullish put spreads into market strength. You can buy them back for pennies or let them expire. Don’t put many new trades on. There will be opportunities to sell out of the money bullish put spreads on stocks that have positive earnings reactions, but these positions should be very limited. Once we are in cash, we will monitor market conditions from the sidelines and we will wait for the next window of opportunity. We’ve had a fantastic year and I don’t want to give those profits back. We sold out of the money bullish put spreads in the first two months of the year and we were on the sidelines during the crash. Before the market reached its low we were selling out of the money naked puts with incredible success. When support was established in April we aggressively sold out of the money bullish put spreads and we continued until now. Good news is priced into the market and I believe we are going to hit a rough patch in a month (or less). Instead of managing losses, we will be looking for opportunities to deploy our cash.

Day traders should wait for support this morning. Opening gaps higher to resistance have a tendency to reverse. I will be watching tech stocks on the open to see if they still have “gas in the tank”. If we are going to see a gap reversal, it will happen in the first 45 minutes of trading and we will see long red candles closing on their low very early in the day. Once support has been confirmed we can buy stocks with relative strength. We’ve seen an incredible amount of intraday volatility in a 100 S&P 500 trading range during the last week. It’s impossible for me to tell you how the day is going to play out before the open. We will use the 1OP indicator to time our longs and shorts.

Swing traders should use this opportunity to get to a cash position and to reduce risk during the next two weeks. Day traders should look for early opportunities. Reduce your trade count and your size. I will be trading half-size in the morning and quarter size in the afternoon. I still view this as a low probability trading environment.

Support is at SPY $312 and $317.40 and resistance is at $322.70 and $323.40.
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