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Buy Stocks With This Pattern - Stimulus and Earnings Will Keep Buyers Engaged Until the Election

Posted by Pete Stolcers on October 15

Posted 9:30 AM ET – The market staged an incredibly strong rally last week and we saw three days where the gap higher never traded below the high from the prior day. Yesterday we filled in the gap from Monday and this morning we will fill in the gap from Friday. When the market gets ahead of itself we can expect profit taking. Much of the bad news that I’ve been outlining has been discounted and now it is coming back to roost.

Some analysts are blaming the 40 point S&P 500 decline overnight on the stimulus bill (or lack thereof). I don’t buy into this argument because the election is two weeks away and the bill will be the first item on the docket for either administration. Both parties want a stimulus deal; they just don’t agree on the structure or the dollar amount. The market will soon get its “fix”.

The bigger concern is that the Coronavirus is spreading quickly in Europe and major metropolitan areas in England, France and Germany are in strict lockdown. Now that temperatures are dropping, more people are inside and the virus is spreading more quickly. We have seen the number of new cases and the percent positive increasing in the US as well. This will hamper the economic recovery.

This morning we learned that 898,000 people filed for unemployment benefits. Analysts were expecting 830,000 new initial claims applications. State and local governments are running huge deficits and we are likely to see layoffs at that level in the next month or two. Small businesses need the stimulus bill to bridge the gap until a vaccine is developed or until the economy can fully reopen.

The Fed will not raise interest rates even if inflation rises above their 2% target. This makes equities attractive relative to bonds. Corporations are issuing debt at very favorable rates and they are using the proceeds to buy back shares. This is an incredibly powerful force and it will keep a bid to the market as long as credit conditions remain stable.

Earnings season has kicked off and major banks are dominating the scene. Earnings from major lenders have been very soft. Financial institutions that engage in trading (i.e. Goldman Sachs) can offset some of that weakness with trading profits. Tech giants will start posting results next week and the results should be excellent. This will keep buyers engaged.

Swing traders should take advantage of this market dip by selling out of the money bullish put spreads on strong stocks that have a tendency to rally into the earnings announcement. Yesterday we entered three new trades and this morning we may get filled on another. This will be the last chance to generate income before the election and our options trades expire on October 30 or earlier. I prefer selling out of the money bullish put spreads because we can distance ourselves from the action and we can take advantage of accelerated time decay. We have been selling the spreads below major technical support levels and we have been using Option Stalker searches to find them. I plan to be in cash before the election because I’m fearful that the outcome might not be known for weeks. There are early voting issues nationwide.

Day traders should stay nimble today. The selling pressure yesterday was persistent and this morning we will test support at SPY $342.50. Wait for the selling pressure to abate and buy stocks with relative strength and heavy volume. You should consider running searches with Pre-Earnings Bull as a search variable. Try to scoop stocks on that list that report in the next two weeks and that have relative strength. When the market is able to find support this morning I believe that this early decline will provide an excellent entry point for the stocks and you can hold some of these positions overnight if the market is able to close above SPY $342.50.

For the next two weeks I believe that Asset Managers will care more about the stimulus bill and tech earnings than they do about the Coronavirus. Try to generate income by selling out of the money bullish put spreads (don’t go overboard) and try to scoop stocks that have a history of rallying into earnings.

Support is at SPY $342.50 and $339. Resistance is at $345 and $347.
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