Market Will Be Trapped In A Range – Here’s Why and Here’s the Trading Strategy

Posted 9:30 AM ET - There is nothing incremental to report overnight and we are in a news vacuum. Major economic releases were better-than-expected last week and we are waiting for earnings season to start next week. Buyers are typically engaged ahead of mega cap tech earnings so the bid will be strong on any dip to the 200-day moving average. The Coronavirus is spreading and it will impede our economic recovery. This will keep a lid on the market and resistance at SPY $318 is building. We are likely to trade in a fairly wide range the next few weeks. ADP, ISM manufacturing, the Unemployment Report and ISM services were all better-than-expected and they showed that the economic recovery is underway. New Coronavirus cases are increasing and we have eclipsed the peak from April. States that are in Phase 3 account for more than 40% of our domestic GDP and this will hamper the economic recovery. I believe that credit concerns will start to surface in the next few months. Earnings season will reveal the bottom-line devastation caused by the shutdown. Banks will start reporting next week and we can expect massive write-downs. The financial sector has been beaten down and bad news is priced in (no big sell-off on the news). Fear not, mega cap tech stocks will report in two weeks and many of them have prospered during the shutdown. Apple, Amazon, Facebook, Google and Microsoft account for 20% of the S&P 500 market cap. The rally has been narrowly defined and the QQQ is making new all-time highs. I view this heavy concentration of strength as a long-term warning sign. Swing traders should sell out of the money bullish put spreads on strong stocks. Keep your risk exposure light. Go farther out of the money and reduce your size and trade count. I feel that we still have a few good weeks before profit taking surfaces. I am selling out of the money bullish put spreads that expire in three weeks or less so that I can constantly reevaluate market conditions and so that I can take advantage of accelerated time premium decay. This strategy also allows me to distance myself from the action. I am not chasing parabolic stocks; I am looking for horizontal breakouts through resistance on heavy volume. Earnings season will provide us with opportunities and we will be looking for strong reactions after the number. As we get into August my market bias turns significantly more bearish. Day traders need to wait for market support. Down opens have provided the best day trading conditions. We can easily spot stocks with relative strength using Option Stalker searches, we just have to wait for market support. Yesterday we benefited from a large intraday swing. When we are outside of the prior day range we can be more active. When the market is trapped in the prior day’s range or the first hour range we have to be much more careful. When the market can't get out of that range we should expect reversals when we reach an extreme and we need to set passive targets (scalp). When the market is able to break out of those ranges we have a chance for directional momentum and we can stick with the trades a little longer. These are the “dog days” of summer and the news cycle is light. Reduce your trade count and your size. I view this as a low probability trading environment. The market has not moved much in the last week and we can expect similar today. When it gets like this we can expect "recycled news" and choppy price movement. Support is at SPY $312.50 and $311. Resistance is at $315.50 and $317.50. . .

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