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The Last Leg of the Rally Can Be Very Profitable - But Conditions Can Change Instantly

Posted by Pete Stolcers on January 12

Posted 9:30 AM ET – The market is priced for perfection as we head into earnings season. Dark clouds are being ignored and we could see a buying climax in the next week or two. The SPY has poked through the upper end of a trading channel and the bid remains strong. These moves typically play out very quickly and I suggest scaling out of long positions on any big breakouts.

Big banks will start reporting this week (JPM Friday). They ran up on the notion that the $2000 stimulus checks will be cut. Historically low interest rates and a weak employment backdrop will weigh on future earnings and I believe any upside from here is limited. Buyers tend to be engaged ahead of mega cap tech earnings and I believe they could be the catalyst for the breakout. Tech giants have largely been unaffected by the Coronavirus. At a current P/E of 40, stocks are rich.

The new variant of the virus is spreading rapidly through Europe. Coronavirus cases continue to rise in the US and experts agree that vaccinations won’t have a material impact in the first half of 2021. That means that the anticipated economic rebound will be impeded.

Democrats are trying to impeach Trump again and this has no market impact.

Swing traders who are not able to watch the market during the day should be passive. Sell out of the money bullish put spreads that expire in three weeks or less on strong stocks. We currently have four bullish put spreads on and this is a way for us to play the last leg of this rally while maintaining some distance. Accelerated time premium decay is constantly working in our favor. Stock selection is critical at this juncture and I would avoid any stock that has gone parabolic. Clean energy stocks, pot stocks, crypto stocks, human genome stocks and electric car stocks are over-extended. We are focusing on stocks that are about to announce earnings and that have a history of rallying into the number. This gives us an additional statistical edge.

When I say that swing traders should be passive, it does not mean that I am not participating in the rally. Day trading conditions have been excellent with large intraday moves. I am favoring the long side, but I am patiently waiting for entry points. We’ve seen many gaps higher and most of them have been a “fade” (shorting opportunity). Experienced traders don’t chase, they wait for a pause or a pullback. This retracement allows us to identify relative strength and we start lining up the best candidates so that when market support is established we are ready to buy. This morning the market will open flat. The SPY closed near its low of the day yesterday and that is also near the low from Friday. If support and $377.50 holds during the first hour we are likely to rally. If the market makes a new low after two hours of trading, favor the short side. Be patient and spend the first 30 minutes finding your stocks.

Support is at SPY $377.50 and resistance is at $381.50.
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