December 8, 2020
Posted 9:30 AM ET - Yesterday the market took a breather and it closed below the all-time high. The rally is a little extended and we can expect profit taking at this level. I am not bearish; this is simply a pullback in a bull market. Traders should not add to bullish positions until we test support. You will have a better entry point for long positions next week. There's not much incremental overnight news to drive the market. The Coronavirus is spreading rapidly and economic activity will contract. Fortunately, vaccines are on the way and they will quickly be distributed in coming weeks. Politicians are trying to get a partial stimulus bill passed for $900 billion. Stock valuations are stretched at a P/E of 40. Investors are focused on an economic rebound in Q1 and they are willing to ride out this rough patch. Swing traders took profits on the SPY position on the open yesterday - we made about nine dollars. I suspected that the market would float higher and this was just a little "kicker" to goose our profits. Our primary trading strategy has been to sell out of the money bullish put spreads. This is a time to manage those positions and to let time decay work its magic. We don't want to add to bullish put spreads until we get a market pullback. Option implied volatilities have collapsed and new trades would require us to go close to the money to receive the credit we want. A small market drop could easily send those stocks in the money and we don't want to be managing losing trades. Your bullish put spreads that you've been putting on the last few weeks should be in great shape. With each passing day time premium decay will be generating profits. I believe that we could see a pullback to SPY $360 and if that support holds we will consider selling new bullish put spreads. Day traders should expect two-sided trading. I've been able to find opportunities on both sides, but I prefer the long side. Seasonal strength will provide a bid and there's always a chance that bullish stimulus news could hit the market during the day. All it would take is positive comments from a Pelosi/Mnuchin meeting. Heavy Buying, Relative Strength 30 and Bull Run are your go to searches. The market volume is drying up and the daily ranges are half of what they were a month ago. This is a time to reduce your trade count and to trim your size. Support is at $365 and resistance is at $370. . .
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