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Market Will Inch Higher - Set This Alert and Use This Level As A Stop

Posted by Pete Stolcers on November 6

Posted 9:30 AM ET – The market is inching higher on light volume. Investors are pinning their hopes on a US/China trade truce, but a timeline has not been established. The Fed is not likely to ease the rest of the year and stock valuations are at the upper end of their range. Consequently, Asset Managers are not overly concerned that they will miss a year-end rally.

Last week the breakout was tested twice on heavy volume and we bounced off of SPY $302 both times. The resulting bullish hammers fueled some buying and the FOMC pullback that everyone was hoping for did not materialize. That excitement from this market breakout has waned.

One of Trump’s battle cries is that the market is making all-time highs under his reign. This is important to his reelection and his tweets should be relatively subdued with regards to China. Even if a truce is not reached, the market won’t care as long as talks continue.

Boris Johnson is preparing for the December 12th election in England and it could swing either way for him. If he gains support a Brexit deal will be likely. In any case, this dark cloud has temporarily parted.

Economic data points have been good. Europe’s numbers have been ticking higher from dismal levels and China’s growth is also showing signs of improvement. ISM services came in at 54.7 and that was better than expected.

Earnings season is winding down and the results have been better than feared. Guidance has also been good. With stock valuations at the upper end of their trading range we should not expect a runaway rally.

Swing traders are long a half position of SPY. Set your stop at $305 on a closing basis and your target at $310. We have primarily been selling out of the money bullish put spreads on strong stocks for the last month. Your short strike price should be below technical support and these positions are working out beautifully. Our position is mildly bullish and I don’t want to get more aggressive until we have a dip. The market has been gapping higher on the open and flat-lining during the day. This is a perfect environment for selling out of the money bullish put spreads and we are taking advantage of time decay. Monday is a banking holiday and the action will be extremely light. Once we make it through the week, our bullish put spreads will be much easier to manage. I have some spreads that will expire Friday, but the majority of my spreads will expire on November 15th. I will reevaluate market conditions each week and establish new positions. One of my favorite Option Stalker searches looks for strength after earnings during the last two weeks. I want to see the earnings gap hold and I’m looking for relative strength.

This is a tough environment for day trading. The intraday ranges have collapsed. When we do get a move it happens in the first half hour and then we sit. I believe that you need to have a handful of overnight positions. Take profits on gaps higher the next morning and look for new candidates during the day. Heavy volume is the key right now. Use that in all of your Option Stalker searches. I have been looking for stocks with high volume in the last 15 minutes and that are on a five minute buy signal and that have relative strength on a five-minute basis. Try to catch the momentum early in the move and set passive targets. Most of your gains will come in the first two hours of trading, but you might be able to find a few gems during the day with this search. You won’t get any help from the market so the stock has to do it all on its own. That’s why heavy volume is so critical right now. Banks, basic material stocks and Chinese stocks have had good intraday momentum this week.

Expect small overnight moves higher and lackluster trading during the day.

In Option Stalker I have drawn a GTC downward alert line on the VXX/VIX. It is making new lows for the year. I suggest you do the same. This will alert you if there is a spike in option IVs.

I will not be posting market comments Friday.
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