Swing Traders Keep It Small – Look For These Bullish Put Spreads
Posted by Pete Stolcers on November 18
Friday the market broke through resistance and it made another new all-time high. A US/China trade truce looks likely and high-level negotiations took place over the weekend. Both sides are making positive remarks. The path of least resistance is up.
Rumor has it that the US will postpone the December Chinese tariff hikes and it might repeal some of the September increases. A Reuters article said that Huawei licensing restrictions for US companies might be lifted for 90 days. In exchange, China will purchase specified quantities of US agricultural products, it will protect intellectual property rights and it will not engage in currency manipulation. Larry Kudlow (US Economic Advisor) said that the final brushstrokes are being painted and both countries are probably hashing out enforcement.
A trade truce will not have much of a market impact, but it will prevent trade tensions from escalating and that is what the market cares about.
Nancy Pelosi suggested that Democrats will sign the USMCA trade agreement. From my perspective this is a much bigger development since it involves our two largest trading partners. This could have a material economic impact.
Last week Jerome Powell testified before Congress and monetary policy will remain unchanged through year-end. The Fed is content with current conditions and current yields.
Brexit will not be an issue until the December 12th election. If Boris Johnson gains seats an exit agreement is likely and that could fuel a year-end rally.
Earnings season is almost over and the results have been better than feared. Stocks still have some upside, but valuations will start getting stretched if we see a melt up.
The economic calendar is very light this week and that favors the current market momentum.
Swing traders are in cash. We took profits on our SPY position last week and on bullish put spreads. We need a market pullback so that we can reload. I feel that we are due for an “ugly day” where bullish speculators get flushed out. That will be our opportunity and I don’t know what will spark profit taking. Until then, option premiums are so small that credit spreader’s have to go too close to the money to generate a decent return. A small market whiff will create problems and the risk/reward is unfavorable for large bullish put spread positions. As I mentioned in Friday’s comments, I am looking for stocks that have lagged and that have strong momentum and breakouts through major resistance levels. I am selling close to the money put premium on a handful of stocks on the notion that there will be upside follow-through and that support at technical support will hold. Heavy volume and relative strength are key components and Option Stalker searches make it easy to find the stocks. I am only entering a handful of positions and I won’t get aggressive until we have a market pullback. This is a critical point. It is time to decrease your size and risk exposure.
Day traders need to wait for support. A daily SPY chart shows a series of green candles. That information tells us the market opens near its low and it closes near its high. Use the first hour to find stocks with heavy volume and relative strength. I have been using these Option Stalker searches: Heavy Buying, Relative Strength 30 and PopBull. It only takes a few minutes to zero in on the best stocks. Once I have my list I monitor relative strength. As the market ticks lower I want to see the stock hold its bid or move higher on good volume. The Option Stalker relative strength indicator on a five minute basis needs to be > 0. AMRN, ROKU and CVS are good examples from Friday and we traded these in the chat room.
Support is at SPY $310 and $307. Resistance is at the high from Friday. Look for a gradual drift higher this week and be prepared for a possible dip. I will be looking for long tails above the body as a sign of resistance and selling late in the day. Until I see it, I will expect follow-through to the upside.
Subscribe to my YouTube channel and you will be notified when I post my morning video. Also monitor my posts to the channel during the day. Friday I posted a great ANRN and CVS lotto call trade in the last 30 minutes of trading.
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