Market News Will Be Heavy For Another Week – Use This Options Trading Strategy
Posted by Pete Stolcers on April 1
Yesterday the SPY tried to get through a technical resistance level at $263. Late day selling ahead of major economic releases is spilling over this morning and the S&P 500 is down almost 100 points before the open. I’ve been saying for weeks that this will be a bottoming process and that horrific news lies ahead. The Coronavirus still has 10 more days before it peaks and there will be many casualties. The first step to recovery is to control the spread of the virus.
ADP reported a loss of 27,000 jobs in the private sector during the month of March. This is much better-than-expected and it does not truly reflect the employment picture. Most companies have just started laying off people. Retail giants like Macy’s and Kohls are laying off hundreds of thousands of workers and that news is just coming out. The Unemployment Report will be released Friday and it will also underestimate the damage. Jobless claims increased by 3.2 million last week and it would’ve been multiples of that number if they had been able to keep up with unemployment applications. I believe that 50 million workers will be unemployed during the month of April as the national shutdown continues. ISM manufacturing will be posted 30 minutes after the open.
Scientists believe that casualties could be as high as 240,000 and as low as 100,000 in the US. Cities are building temporary hospitals as fast as possible.
There are slivers of light. Vaccines are being developed (8 months away at best) and treatments are being tested. Abbott Labs has a detection test that can provide results in five minutes. As more people are getting tested, the number of new Coronavirus cases will skyrocket. This should not be deemed the spread rate since we are still establishing a base.
The $2 trillion stimulus program and the $4 trillion war chest behind it are needed, but investors are ignoring this backstop for the time being. It’s all about the spread of the virus and the duration of this lockdown. Once the virus has been contained we can deal with the aftermath.
Italy believes that its GDP will decline 6% this year. It has been struggling with credit issues and spiraling deficits for the last decade. The US deficit could total at least $3.7 trillion in 2020, a level not seen since World War II. The duration of the shutdown and the speed of the recovery will determine if there are credit issues.
Swing traders are long a 1/2 position of SPY at $238. We are going to hang onto that position and we are going to see if we can buy the second half at a better price. Our eight naked put positions will not even remotely be affected by this morning’s market decline. Most of our stocks would have to drop 50% in the next three weeks for us to risk assignment (which we want). My forecast looked for a bounce last week with many aftershocks and I told you we would see additional selling this week. This will be a bottoming process and we will continue with our current strategy. Tonight I will be releasing by Weekly Swing Trading Video and I will highlight new candidates for put writing. Our goal is to generate income during this bottoming process and to take advantage of extraordinary option implied volatilities.
Day traders need to tread cautiously. Let the market come in and spend the first hour identifying relative strength. If the market is able to establish a meaningful low early in the day (consecutive long green candles closing on the high on a five minute basis) we will spend the next few hours grinding back. If the market makes a new low after two hours of trading we are likely to see a downtrend day. I am going to monitor the action and wait for my windows of opportunity. I still prefer to trade from the long side. In the last week we have established a bid. Today we will see how aggressive buyers are at this level. Asset Managers will not wait for the Coronavirus spread to decelerate in two weeks, they will start nibbling now. If we have a tradable bounce, make sure that you instantly place targets on your longs. Don’t milk the trade. Conditions can change instantly. We want to be in and out of trades. The goal is always to get back to cash so that we can objectively evaluate the price action.
Look for dire news in the next week.
Support is at SPY $250, $235 and $215.
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