Market Volatility Will Continue – Here Is the Plan For Swing Trading and Day Trading

Posted 9:30 AM ET - Yesterday the S&P 500 dropped 150 points and it closed near the low of the day. The news will be "heavy" the next two weeks. Coronavirus deaths continue to mount and scientists believe that US fatalities could range between 100,000 and 220,000. The worst news lies ahead and the virus should climax in the next 10 days. Stocks are recovering some of their losses from yesterday before the open, but we should expect more selling. The government will pull out all of the stops to avoid a financial crisis. In the next few weeks, workers will get a $1200 check from the government and that should help to tie them over. Landlords are expected to provide a grace period and that will work its way up to lenders (banks). The Fed will backstop the banks. This is a global event and the back stop will work its way up to the sovereign level as cross currency swaps support central banks. The first priority is to contain the virus. Stocks will not have a meaningful bounce until the numbers start improving. Once people return to work, the focus will shift to credit. The $2 trillion stimulus package provides employment incentives for businesses. Small companies can take out "bridge loans" and they will be completely forgiven by the government if they retain all of their employees. This should speed up the economic recovery. If the shutdown ends in the next few weeks, short-term credit concerns should be minimal. If the shutdown lingers for two months the credit “wheels” will start to wobble. The big unknown is consumption. Will people change their patterns after this event or will they quickly resume their normal lifestyles? Companies that are reporting earnings have posted good numbers, but the guidance (when provided) is negative. We are all in uncharted territory and there is no clarity. During this discovery process there will be plenty of short-term trading opportunities. ISM manufacturing came in at 49.1 yesterday and that was a negligible drop. This is a survey so it is forward-looking. I expected a much lower number and I question its accuracy. Initial jobless claims spiked to 6.6 million this week and we can expect horrific numbers the rest of the month. On a very long-term basis we have to watch sovereign debt levels. In the US our deficit will exceed $3.7 trillion this year. Italy's credit has been horrible for the last decade and tourism accounts for 15% of its GDP. PIIGS credit watches could return. Many industries will take years to recover and there will be casualties. The key right now is to stay fluid. Swing traders are long 1/2 position of SPY at $238 and we are selling far out of the money naked puts on stocks that we want to own if they drop dramatically from current levels. These moves would need to happen quickly for us to get assigned. If it takes time for the next leg of this decline to unfold, we will collect expensive premiums that we have sold and the strategy will generate average returns of 10% per month per position (leveraged). Option implied volatilities will not remain high and this opportunity will run its course in the next month or two. Once option premiums decline we can consider buying strategies if we have a strong directional bias. We need clarity and we are going to stick with our current plan. Last night I recorded my Weekly Swing Trading Video and I highlighted 4 new naked puts to sell. The market rally this morning might prevent us from getting in, but the day is young. My plan is to have the swing trades working and to distance myself from the action while this volatility continues. I don't want to think about these swing trades, I want to focus on day trading during market hours. The rally this morning feels good, but the bid will be tested. Look for stocks with relative strength during the first 30 minutes of trading. As the market pulls back we want to find stocks that are moving higher. Consecutive green candles closing on their high are the pattern we want. I prefer stocks that are above the prior day's high because they have already cleared resistance. Heavy volume is another important characteristic. Wait for market dips, find stocks with relative strength, buy them when the market finds support and set targets. When the market bounces you will hit your targets and get back to a cash position. Then we need to wait for the next cycle and repeat it. We are seeing two-sided action and that means we could have two or three cycles per day. Look for more negative news during the next week. Ideally, we will see the S&P 500 make a higher low in the next two weeks and the bottoming process will begin. If the S&P 500 takes out the low from March 23 the recovery will take much longer. . .

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