Daily Commentary: January 26, 2021

Jeremy Engelbrecht1Option Commentary

Big Tech Earnings Start Today – The Reaction Will Determine If the Market Melts-up

Posted by Pete Stolcers on January 26

The key take away from yesterday’s price action is that there are buyers and sellers. After an early attempt at a new all-time high, the S&P 500 fell 60 points in a half hour. We can expect that type of volatility to continue. Tech giants will start reporting and MSFT, AMD and TXN will announce earnings after the bell today. Apple and Facebook will also post results this week. Buyers are typically engaged into tech earnings and the market bid should remain strong for at least a week. A $1.9 trillion stimulus bill will also keep a strong bid to the market. The FOMC statement tomorrow will be extremely dovish and interest rates will remain at historic lows well into 2022.

The Coronavirus is starting to climax and the number of new cases is gradually declining. We are not out of the woods and vaccinations are slower than expected. We also have to keep an eye on the new mutations. Moderna (MRNA) said that its vaccine is extremely effective against the new mutations and they are developing a booster shot to improve that even more. Most analysts agree that the vaccinations will not have a material impact until May. States are gradually starting to reopen.

The economic backdrop is tenuous and job losses are on the rise. Initial jobless claims have been north of 900,000 during the last four weeks. Democrats control Congress and the White House so a stimulus bill should be forthcoming. Even if it is $1 trillion (instead of $1.9 trillion) that is still an incredible amount of money. The Fed is adding as much liquidity as it can.

Stocks are priced for perfection and they are priced for a swift economic rebound in Q1. The S&P 500 is trading at a P/E of 40 and the reaction to tech earnings will tell us how much gas is left in the tank.

Swing traders should not be adding bullish put spreads at this time. We have a number of positions that are scheduled to expire in the next two weeks and we will see how they play out. Once the tech giants report earnings I feel that some air might be let out of the balloon and we could see profit-taking. Bullish sentiment, overbought technical indicators, record margin borrowing, low option implied volatilities (low fear) and high valuations are a sign that risk is elevated. We won’t chase stocks; we will patiently wait for a pullback. Yesterday’s price action was a warning sign and you can see how quickly conditions can deteriorate. One minute everything looks great and the next minute the bottom falls out. Instead of managing losing trades, we want to focus on opportunities and that is why I plan to be in cash by the end of next week.

Days traders should look for opportunities on both sides of the market. Use the 1OP indicator as you guide. I still prefer to buy stocks and dips have been excellent opportunities when the 1OP indicator has a deep trough and a bullish cross. Stick with nice steady stocks that are not parabolic on a daily chart. Stocks that have been flying (i.e.GME) have incredible risk. I prefer stocks that are not parabolic, but that are on a nice steady trend higher or stocks that are just breaking through technical resistance on heavy volume. If I get a nice intraday market move with a wide range, I will trade S&P futures. Stay fluid and use the 1OP indicator on a five minute chart of the SPY as your guide.

I still believe that there is a chance for a blow-off rally. If it is going to happen it will take place in the next week. A spike through the upper end of the trading channel would set up a buying climax and there could be an excellent short-term shorting opportunity if that happens.

Support is at SPY $376.50 and $379.50. Resistance is at the all-time high.

Live Trading

Open an Account

Paper Trading