Daily Commentary: August 19, 2020

Jeremy Engelbrecht1Option Commentary

This Is How You Should Trade the “Dog Days” Of Summer

Posted by Pete Stolcers on August 19

The S&P 500 continues to float higher on light volume. We are in the “dog days” of summer and the news cycle is very light. A daily chart of the S&P 500 shows tiny bodied candles and the market has tended to close right where it opens. I believe the upside rewards are smaller than the downside risks.

Earnings season has ended and Q2 profits were down more than 30% on average. The second wave of the Coronavirus has impeded the economic recovery and Q3 is likely to disappoint. At a current P/E of 23, the S&P 500 is rich by historical measures.

The economic calendar will be light for the next two weeks.

The market had priced in a $1.5 trillion stimulus package and that does not look likely. Both parties are consumed by their respective conventions and Congress is in recess. Small businesses need this lifeline and initial jobless claims could start to tick higher.

Option implied volatility is declining and credit spreaders are taking greater risk when they sell premium close to the money. A couple of nasty days in the market could spell disaster for this strategy. Premium buying strategies are exposed to time decay if the market flat lines.

Swing traders who can’t watch the market intraday should be in cash. The market could float higher on light volume, but these gains can be quickly stripped away in a day or two. In a few weeks we will have better clarity and possibly a better entry point after a market dip. We will patiently wait for conditions to improve.

Day traders should assume that a range will be established in the first 90 minutes of trading and that the market will test both extremes during the day. Watch for opportunities to trade reversals off of those extremes. The market won’t help or hinder day trades and aggressive traders can try to catch stocks with relative strength early in the day. Look for breakouts on a daily chart and heavy volume. On a five minute chart, look for consecutive long green candles stacked on top of each other. That is a sign of strong momentum. Set passive targets and use the 1OP indicator as your guide.

Take time off and eliminate the temptation to force trades in this low probability trading environment. If you are trading, reduce your size and your trade count.

I don’t think it will be tested in the next two days, but SPY $325 is an important support level.

I will not be posting market comments or videos Thursday or Friday. Trade well and keep it light.

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