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Take Gains On SPY and Wait For A Better Entry Point Soon

Posted by Pete Stolcers on February 22

Posted 9:30 AM ET – The S&P 500 has been flat the last two weeks. Buyers and sellers are in equilibrium and there are cases to be made on both sides. Enthusiasm over a $1.9 trillion stimulus bill is somewhat muted and traders will believe it when they see it. Democrats control both the White House and Congress and there is no reason why they can’t push this bill through as promised by the end of the month.

Bonds are selling off and yields are rising quickly. This is because of strong economic data and a big decrease in new Coronavirus cases. The Fed has repeated that it will not tighten until they see a robust employment recovery. We are in a “sweet spot” for the next few months and the Fed wants inflation to rise above their target. Treasury Secretary Yellen (former Fed Chairman) agrees that the greater risk to the economy is under shooting and she favors going “big” with the stimulus bill.

Corporations have been raising guidance at a much faster pace than expected.

Historically the first rise in interest rates is not well received by equities and we are seeing that first pop in yields. I believe that bonds will find support fairly soon. In a weekly TLT chart you can see that bonds are in a bearish market and that they have fallen below the lower end of a trading channel. This pattern usually results in a selling climax and I believe that we will see a nice bounce towards the end of March.

Swing traders should be scaling out of call positions. I was expecting a blow-off rally once the stimulus bill was approved and that move has to happen this week or we will exit our call positions. Call positions are constantly fighting time decay and we have not gotten the upside breakout I expected. Fortunately, our bullish put spreads are in good shape and this is the best strategy to use given the current market environment. Any dip to SPY $377 will present an opportunity to sell more bullish put spreads. That is the upward sloping trend line and the 50-day MA. Look for strength in some of the laggards that will benefit from an economic rebound (casinos, airlines, travel). We are going to sell our SPY position on the open. I am not bearish, but I feel we may have a better entry point in a week or two and I feel the breakout at SPY $385.80 could be tested this week.

Day traders should wait for support this morning. I like down opens because relative strength is much easier to spot. We will take out short-term support levels and we need to make sure that the selling pressure does not accelerate throughout the day. If the market makes a new low after two hours of trading, favor the short side. This would be especially true if we are below SPY $385.80. If the market instantly finds support we will see consecutive long green candles closing on their high stacked one on top of the other in the first 30 minutes. I’m not expecting this, but it would be bullish and the market would close most of the opening gap by the end of the day. The most likely scenario is two-sided trading back and forth. Once the market drifts lower and forms a double bottom higher low you will be able to buy stocks with relative strength. Heavy Buying, Relative Strength 30 and Bull Run will be your go to searches in Option Stalker.

Support is at $387 and $385.80. Resistance is at $392.40.
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