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Wait For Market Support and Sell These Bullish Put Spreads [VIDEO WITH PICKS]

Posted by Pete Stolcers on January 30

Posted 9:30 AM ET – Yesterday the market gapped higher and it instantly gave back those gains signaling selling pressure. It gradually tried to challenge the high of the day, but sellers forced the S&P 500 back down to its low. That profit-taking suggested that we might see follow-through this morning and the S&P 500 is down 25 points before the open. The warning signs are there and we can expect support from earlier this week to be tested.

Earnings have been excellent, but stocks are struggling to advance. Apple posted fantastic results and the stock was up 2%. Microsoft is up about the same after an excellent number and Facebook is down 7%. Stock valuations are a little stretched at a forward P/E of 18 and we can expect profit-taking. Amazon will report after the close today. Sellers are typically very passive ahead of mega cap tech stock earnings reports and after today GOOG will be the only FAANG left to post. Once they have all reported, I expect that some “air” will be let out of the balloon. I’m not looking for a major market decline, just stiff headwinds and a possible retracement to SPY $320.

The Coronavirus is spreading and its impact has been discounted. Many parts of China have been shut down to slow the spread of the virus and this is happening during their busiest time of the year (Chinese lunar New Year). For instance, Starbucks will close 2000 coffee shops during this outbreak. It will have a material impact on economic activity and some analysts believe that GDP growth could come in at 4% this quarter (6% expected). This virus will have a temporary effect, but its full extent is still not known.

This morning we learned that Q4 GDP came in at 2.1% (better-than-expected). Domestic economic growth has been solid.

The FOMC statement yesterday revealed that the Fed will remain accommodative. Jerome Powell has expressed concerns of disinflation and there’s a chance that we could see further easing if it surfaces.

Swing traders should be relatively passive. Start scaling into bullish put spreads. I’m expecting more selling and that will set up excellent buying opportunities at lower levels. Look for stocks that ran higher on strong earnings and that are resilient during this market pullback. In particular, watch the horizontal breakouts and the opening price from the gap higher. If those levels hold and the stock is strong relative to the market, it will go higher as soon as the market finds support. This is one of the patterns I am looking for when I sell out of the money bullish put spreads. You need to have these candidates ready to go because the market could find support in a matter of days. I’m also looking for stocks that have been beaten down and that have been gradually grinding higher during this little market speedbump. That is a sign that Asset Managers are rotating into the stock. There are many post earnings plays that are setting up and Option Stalker is helping me find them. We need to see market support. I will be watching for a bullish hammer on a daily chart with the tail around the SPY $320 level. That pattern will give me the confidence to start aggressively selling more bullish put spreads. Watch for a deep low in the next week with an intraday reversal.
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WAIT FOR MARKET SUPPORT AND SELL THESE BULLISH PUT SPREADS

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Day traders should watch the early action and see if there is follow-through selling. If this gap down stalls immediately and we see long green candles stacked one on top of the other, we will rally back the rest of the day. If we see long red candles stacked one below the other in the first 30 minutes of trading we will have a bearish trend day. We want these long red candles to close on their low and we don’t want them overlapping. The most likely scenario is that the market probes for support and then makes a half-hearted attempt at the high of the day. Long tails above body and long red candles closing below the low of the day would tell us that there is more selling to come. My gut tells me that we are going to see some selling today and I explained why I was buying SPY puts and holding them overnight in the chat room. If I see additional selling pressure this morning and the patterns that I’ve outlined, I will hold onto my puts. Bullish speculators have not been flushed out yet and I believe that is about to happen.

While the market is selling off today, I will be looking for stocks with relative strength and I will be adding them to my watchlist. I’ll be day trading from the short side and looking for bullish put spreads to sell on strong stocks when the market finds support.
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