Market At All-time High – A Blow-off Rally Is Possible – Watch For This Pattern

Posted 9:30 AM ET - This morning the S&P 500 will start the week on a positive note. President Trump signed the stimulus bill and there is a chance that the stimulus checks could be increased by Congress. England and the EU have a Brexit deal, but there are still many issues that need to be addressed. The market has the news it needs to make a new all-time high this week. There are a number of warning signs and investors should be cautious. Margin debt levels on a dollar basis hit a new all-time high according to FINRA. Investors are borrowing money to purchase stocks and they are vulnerable to market pullbacks. The VIX measures option implied volatilities and it is also known as the "fear index". It is near historic lows suggesting complacency. Bullish sentiment indicators are extremely high and the S&P 500 is riding the upper boundary of the Bollinger Band. From a valuation standpoint, the S&P 500 is trading at a P/E of 40 and that is extremely high. These are all potential warning signs. The Coronavirus is spreading and the vaccines are being distributed. Most analysts agree that it will take at least a few months for the vaccines to impact the number of new cases. The market can stay overbought for a very long period of time before it corrects. It is foolish to pick tops so don't buy puts. The last leg of this rally could be particularly strong and we could see a "blow off". The upward sloping channel for the S&P 500 started two months ago and a breakout through the upper end of the trading channel is the type of buying climax I'll be watching for. A big “blow off” rally followed by an immediate reversal with long red candles closing on their low would present a shorting opportunity. Don’t jump the gun, this pattern might not even materialize. Swing traders should passively sell out of the money bullish put spreads on strong stocks. Sell spreads that expire in three weeks or less and take advantage of accelerated time premium decay. Increase your odds of success by selling spreads below major technical support levels. This options trading strategy allows you to generate income and to distance yourself from the action. We only have one open position and it will expire Thursday. This trade will conclude a very successful year and we will start from square one in 2021. Day traders should be cautious on the open. Gaps higher have been faded so don't chase. Wait for a pause or a pullback before you buy. Seasonal strength will be in play this week so you should favor the long side. Focus on stocks with heavy volume and relative strength. The new Option Stalker HA Continuation II search is excellent when combined with other short-term variables. I will trim my trade count and my size this week. Support is at SPY $362 and resistance is at $372. . .

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