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It’s Time For This Swing Trading Strategy - Here’s Why

Posted by Pete Stolcers on January 11

Posted 9:30 AM ET – Bull markets die hard, especially when they have lasted more than a decade. The S&P 500 found support just above the 100-day MA and that is a sign that buyers are engaged ahead of earnings season. We saw a similar bullish hammer on December 20th and the market shot higher from that level. Swing traders should sell out of the money bullish put spreads and day traders should focus on the long side today.

The market sold off hard in the first hour of trading Monday and then it made a higher low double bottom. Buyers had been waiting for support and that confirmation sparked buying the rest of the day.

As long as the Fed has not started to tighten, the market bid will remain strong. The next FOMC meeting is 2 weeks away so we still have time.

A potential speedbump this week is the CPI. It will be released tomorrow before the open. Inflation is putting upward pressure on interest rates and this is an important number. I believe that nervous jitters sparked selling Monday. Previous inflation readings have resulted in very short term market drops and if you buy today, you might have to take a little heat this week, but the 100-day MA will hold this month.

The focus will quickly shift to earnings and they start Friday with JPM. Banks will dominate the early releases. They will benefit from a rising yield environment and I am expecting a decent reaction. Mega cap tech stocks will be in focus and the earnings have been stellar. Consequently, I feel that the bid will remain strong until they post. They will finish reporting during the FOMC meeting so that is an important date to mark on your calendar.

Swing traders, should have 65% of the target bullish put spreads on. Keep adding on market support today and complete your positions. Only the strongest stocks should be considered. Sell the bullish put spreads below major technical support levels and use that as your stop. Make sure the put spreads expire before the earnings announcements and try to focus on trades that expire in 3 weeks or less. Know that you might take a little heat this week after the CPI and PPI. The 100-day MA could be tested again, but it might not be. We are selling out of the money spreads so we have some cushion.

Day traders should be fairly aggressive early today on the long side. The SPY was up overnight as expected after a strong bounce Monday, but those gains have evaporated. We will have a flat open and sellers will test the bid early. Long green candles stacked consecutively with little to no overlap would be very bullish. I hate to chase, but this is one of the times when I would because we are rallying off of a major support level and we are in the low end of the trading range during a bull market. I need to see heavy volume on this pattern to join it and I believe there is a 20% chance we will see it. The most likely scenario is a flat to slightly lower open. 1OP is on a bullish cross so watch for green candles and be ready to buy in the first 30 minutes if they start to stack (30%). A gradual drift lower with mixed overlapping candles is our best scenario (30%). This formation would signal weak trend strength and support. This probe for support will buy us precious time to find stocks with relative strength. They will be easier to spot during a market dip. In my opinion there is only a 20% chance the market will close lower today so I am fairly bullish.

Support is $462.70 and the 100-day MA. Resistance is at the 50-day MA.
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