February 10, 2020
Posted 9:30 AM ET - A week ago the S&P 500 was 100 points lower than the open today and rallied most of the week. Coronavirus concerns sparked selling and the market bounced, signaling a strong bid. The virus is spreading and the death toll is rising. Investors see this as a temporary event and they are willing to look past it. I believe that the market is discounting the economic impact and stocks will do well to tread water for the next few weeks. My bias is fairly neutral and I like selling out of the money bullish put spreads on strong stocks that have relative strength and major technical support nearby. Last week China did not post its trade numbers. That might've been because they did not have accurate data or because they might’ve wanted to conceal extremely weak numbers. Areas of the country that account for 70% of economic activity have been shut down. Many analysts believe that Q1 GDP growth in China could decline by 2% or more. This week China will try to resume manufacturing in select areas. At a forward P/E of 18, stocks are priced for perfection. The Coronavirus is a "fly in the ointment". Stocks need time to grow into current valuations and I believe the S&P 500 will be trapped in a 150 point range during the first three months of the year. This bodes well for selling out of the money bullish put spreads. We know from the price action last week that the market bid is still strong. Domestic economic data points last week were excellent. ISM manufacturing, ISM services, ADP and the Unemployment Report all exceeded estimates. The Fed will remain dovish knowing that a soft patch is coming. Swing traders exited the SPY position on the open Friday and we made a small profit. I did not like the risk profile and I want to remain relatively passive until we know the full economic extent of coronavirus. I still like selling out of the money bullish put spreads on strong stocks. This is the best options trading strategy and it is neutral to slightly bullish. We are focusing on companies that have recently reported excellent earnings and that have relative strength. I like selling these bullish put spreads below major technical support and ideally the spreads will expire in two weeks or less. This allows us to reevaluate risk on an ongoing basis and we can take advantage of accelerated time decay. If technical support is breached, buyback the bullish put spread. The market is finding resistance near the all-time high and it has a few gaps from last week that it needs to fill. First support is at SPY $330 and $327.50 is the next support level. We have been adding bullish put spreads and you should have about two thirds of your allocation on this time. The swing trading video that I posted last week has eight excellent bullish put spreads to choose from. . . . 8 BULLISH PUT SPREADS - WATCH THE VIDEO . . . Day traders should be relatively passive today. Mondays have been very slow and the S&P 500 is flat overnight. In the last few trading days we've seen small bodied candles (dojis) and the closing price has been very close to the opening price. The bad news is that I don't think you'll get much help from the market today. The good news is that I don't believe the market will stand in your way. Focus on stocks with relative strength and heavy volume. On the long side I will also be looking for technical breakouts on a longer-term basis and I want the stock to be above the prior day's high. Try to identify your bullish/bearish candidates early. I like to look for consecutive long green candles closing on their high in the first 30 minutes of trading and I want to see heavy volume (the opposite would be true for bearish candidates). These stocks have momentum. Set passive targets and take profits knowing that you won't have a market tailwind. Option Stalker searches like Heavy Buying, Relative Strength 30 and PopBull are excellent. Look for a fairly quiet day and know if we stray too far from the opening price there will be a good reversal to trade. There are tales above and below the candles the last three days so we can expect a little intraday movement. The news cycle this week is very light. . .
Daily Bulletin Continues...
Want Full Access?
Become a MemberStart Free Trial
No credit card required.