Stock Option Trading Strategy – Keep your size small until a breakout/breadown after Labor Day.

Last week the market had a very strong rebound from oversold conditions. The bounce was able to penetrate a key support level at SPY 146. In order for me to maintain my bullish bias this price level needs to be maintained. Overseas markets are very strong and they are dragging our market higher by its hair. We are the weakest link in the global economic chain and it is likely that there will be more bad news that comes from the housing sector. Today, new housing numbers were released and as you might expect, inventories are higher. In the absence of other news, this piece of information has been able to push the market down in light trading. This week, we will see a number of economic releases that will shed light on the strength of the consumer. I believe that much of the bad news has been factored in and I am looking for a positive reaction to the economic numbers. Earnings are relatively light and they are also around retail stocks. The market is in a precarious position. If it breaks below SPY 146 it is likely to test the lows from two weeks ago. If it continues to rally, the shorts will get squeezed and it could melt up like it did in April. This is going to be a quiet trading week and the activity will be low. Traders have been trying to take vacation time and they've had to postpone their plans due to the market volatility. Without question, they are taking time this week with their families before school resumes. It is likely that next Tuesday will be very light as well. For today, the bears need to be able to apply pressure this afternoon or the bulls will come in and rally prices into the close for the 8th consecutive session. Given that this slide has currently stalled, I see that as a likely event. Keep your size small this week and save your bullets for a breakout/breakdown when normal trading resumes after Labor Day.

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