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Wait For Market Support - Then Sell The Bullish Put Spreads - Watch the New Video Just Posted

Posted by Pete Stolcers on January 6

Posted 9:30 AM ET – Tension in the Middle East is rising and that has sparked profit-taking off of the all-time high set on the first trading day of the year. Democrats are threatening to reduce the president’s military power at a critical time and that is not helping. This market drop will NOT register a blip on the radar a few weeks from now. Military conflicts have typically not produced sustained market declines and this selling provides us with an opportunity to find stocks with relative strength. We’ve been expecting this decline and it will provide an excellent buying opportunity very soon.

The Phase 1 trade deal with China could be signed in the next week and USMCA will be signed by the end of the month. Boris Johnson as the support he needs for Brexit and an agreement is likely in January. We know from Friday’s FOMC minutes that the Fed will remain accommodative in 2020. These are all positive market influences.

ISM services will be posted tomorrow after the open. ADP and the Unemployment Report should show good growth job growth in December and they will be released Wednesday and Friday respectively.

Earnings season is only two weeks away. Buyers are typically engaged into the releases and the market bid should be strong through January.

From a technical perspective the market rally is over-extended. The upper end of an upward sloping channel is been breached on a daily, weekly and monthly basis. We expected the market to come back into the channel and that is happening now. Stocks will need time to grow into their current valuations (forward P/E of 18).

Swing traders are long VXX. Place a target of $18 and exit the position if VXX does not close above $16 today. You should be almost entirely in cash with very little downside exposure. I’ve been urging you to go to the sidelines and to wait for this dip. I posted a video last week with 5 excellent bullish put spreads. As of the close Friday they all looked good and you should continue to watch for relative strength. In the video I also highlighted key technical support levels for each stock. Those support levels need to be preserved and we are going to use that support for our bullish put spreads (short strike price for the put is below support). We want to confirm market support before we sell them. I believe that SPY $319 is the level to watch. If we get a nice bounce early in the day above $319 and the market closes near its high of the day, sell the bullish put spreads where the stock demonstrated relative strength. Early weakness today needs to find support and we want to see a gradual recovery with late day buying. If the market makes a new low for the day after two hours of trading, hold off on the bullish put spreads. On a 5 minute chart you want to see the stock treading water when the market moves lower. That’s the definition of relative strength and it is a sign that buyers are lined up.

CLICK HERE FOR THE UPDATE I JUST POSTED FOR THE BULLISH PUT SPREAD VIDEO

Day traders need to gauge the first half hour of trading. If we see long red bars closing on their low we are going to probe for support. It would mean that this is going to be a down trend day and we are likely to see bearish price action. If the market instantly bounces and we see two or three tests of the low in the first two hours with long tails underbody, we are likely to rally and fill some of the gap. Lofty stock valuations and political uncertainty will spark some profit-taking for the next few days. This dip will allow us to gauge how strong the market bid is and we can expect a few “after-shocks”.

This is the market dip that we have been waiting for. The macro backdrop is good for the market and military conflicts rarely have a lasting impact. Bullish speculators will be flushed out and we want to be there to “pick up the pieces” when they hit the exits. Be patient and watch for support. This will be an excellent opportunity to sell out of the money bullish put spreads, but it might take a couple of days for buyers to step up.
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