Daily Commentary: February 15, 2024

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The Market Survived A Test

Posted by Pete Stolcers on February 15

The backdrop suggests a move higher today. Here is my market game plan for the next few weeks and the price action I am expecting.

PRE-OPEN MARKET COMMENTS THURSDAY – I am bullish and I am sticking with day trades. The market is due for a pause after a nice run up and I feel like I can catch any remaining upside day trading. By keeping my overnight risk exposure to a minimum I can objectively evaluate the price action from the sideline.

A compression that lasts a week would be bullish. That is a sign that buyers are still interested. The supply created by profit takers is absorbed by anxious buyers and it is just a matter of time until the market makes a new all-time high. On a breakout traders can use ATM call debit spreads. This is a bullish outcome and this is an aggressive strategy. There will be some nice quick profits and there is still gas left in the tank. In this scenario, we could see a buying climax that gets us to SPY $510 and it is fairly likely (25%)

A brief (1-2 weeks) and shallow (SPY $490) dip that last a week would also be bullish that would flush out some bullish speculators and perhaps even entice some bears to short. Buyers would still be in control and the dip never gains traction. A breakout to a new high would form a bullish flag. I believe based on the strength of the rally in the last few months that this is the most likely scenario. I also believe that bullish sentiment is high and these “weak hands” are vulnerable. This is still a bullish scenario, but it is a sign that there is some profit taking so we can expect dips along the way. Swing traders can buy longer term in the money options with a delta of .7 or higher. Plan on weathering a few dips along the way. I would put the odds of this at 35%.

A more meaningful pullback to AVWAPQ that lasts 2-3 weeks would signal that there is a fair supply of stock and that profit taking is steady. Buyers are not as aggressive and the drop is a little deeper than expected. It is still well within the range of a normal pullback within a bull market. This scenario would force us to temper our upside expectations and it will take time for the market to get back to the all-time high. It is possible that buyers and sellers find balance and the market stays in a horizontal range for a few months if we see this pattern.  This is still bullish, but we need to favor a more conservative approach. Sell out of the money bullish put spreads and distance yourself from the action. Option IVs will be higher if this plays out (odds 25%) and that favors selling strategies.

Notice that the odds for a big quick move are at 15%. There is nothing I see in the price action to this point that remotely suggests that this will happen.

How can you be so confident that the market is not just going to roll over? The price action that got us here tells me that buyers are firmly in control. How we got from point A (Nov) to point B (Feb) matters. How we get from point B (now) to point C (March) matters. The depth and duration of this dip will tell us what to expect for the next two months. Based on my observations from A to B, I feel that a brief and shallow dip is most likely so that is what I plan for.

The economic releases this morning did not move the needle. Overseas markets were fairly strong across the board. The market dropped on the hotter than expected CPI reading and it bounced late in the day Tuesday. Yesterday the market gapped up and after a bid check the first half of the day it was able to hold the gains. I view this as a bullish backdrop for today and I believe we are going to grind higher. The market will open flat. Find your strongest prospects early and don’t chase high fliers. There is no reason for stocks to be flying higher. Grinders that are at the high of the week will be your best prospects. We are heading into a 3-day weekend so the action could be light.

With the odds stacked in favor of the market moving higher, why not get long? You should be long and you should be in “buy the dip” mode. Instead of loading up on swing trades when the market is resting, I would prefer the flexibility of watching from the sidelines as the action unfolds. Based on my observations I will know when to take action and what my approach will be. We are coming up to a turn, so we take our foot off of the gas and we wait for the straight away.

The bearish “canaries in the coalmine” are TLT and VXX. We want TLT to stay above the 100-day MA and we want VXX to stay below $15.33.

Support is at $490.70 and $495. Resistance is at $500 and the all-time high.

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