Wait For Market Support At This Level – Then Sell Bullish Put Spreads

Posted 9:30 AM ET - Last week the market rallied off of support and it broke through resistance at the 100-day MA and SPY $294 on positive comments from the US/China trade negotiations. Both countries are working towards a preliminary trade agreement but nothing has been signed. Earnings season will begin tomorrow and that typically keeps buyers engaged. As long as the market can hold the 100-day MA you should focus on selling bullish out of the money put spreads. China has tentatively agreed to double its agricultural purchases ($50 billion per year) and to protect intellectual property. In exchange they want the US to postpone the December 15th tariff hike. There are other demands pending as well. This "mini deal" is nothing more than lip service to pacify investors. Both countries know that a full-blown trade deal won't happen before the 2020 election and they're simply trying to calm the markets. These negotiations will be continual with lots of tweets and lots of knee-jerk reactions. In the end, I don't believe a trade deal matters to the market. Both economies are stable and China's currency has been weak. The US is collecting billions in tax revenues and consumers are not feeling the pinch because the yuan has dropped. China's trade data was soft this morning. Imports declined by 8.5% (vs -6% expected) and exports were down 3.2% (versus -2.8% expected). The US exports more than twice as much to Europe as it does to China. Europe's economic conditions are dire and that will have a much greater impact on our economy than a tariff war with China. ISM manufacturing, ISM services, ADP and the Unemployment Report came in lighter than expected two weeks ago. Another round of soft data would spark concerns. The Fed is prepared to ease and traders want a rate cut in two weeks. Global central bank easing is providing a safety net for the market. Monetary policy packs little punch these days from a stimulus standpoint. Rates in many parts of the world are already at zero (or negative). Lower interest rates are not stimulating consumption like they used to. The safety net is more a function of investment returns. Bond yields don't keep pace with inflation so fixed income investors lose purchasing power (negative real returns). This forces everyone to own equities. Corporations are issuing debt at a very low cost (low yield to investors). They are using this cheap capital to repurchase shares. The number of outstanding shares has been cut in half during the last 10 years. If the same amount of money is chasing fewer shares the price goes up. This is an incredibly powerful force and provided that there is not a credit crisis, loose monetary policies by central banks will keep a bid to the market. The market will have pullbacks and they will be buying opportunities at major technical support levels. I've spent a lot of time talking about the fundamentals that will keep the market from tanking. We need to reduce our exposure to the intraday chop by selling out of the money bullish put spreads near the bottom of the range. This strategy allows us to distance ourselves from the action and to generate income (time decay). I am using Option Stalker searches to find these stocks. The “Buy Into Earn” search looks for stocks that have rallied 2 weeks ahead of earnings over 75% of the time during the last three years. This is a big statistical edge and they are prime candidates for this strategy as we head into earnings season. Stocks are trading at the upper end of their valuation range (forward P/E of 17). Good news is priced in. There have not been many preannouncement warnings and that is a good sign. Banks dominate the early announcements and Q3 profits should be good. Unfortunately, lower interest rates and declining economic conditions might keep a lid on any rally. Buyers typically stay engaged through mega cap tech stock announcements and Apple will post on October 30th. Swing traders do not have an SPY position. We tried to get long twice last week and we were shaken out. Focus on selling out of the money bullish put spreads. Find stocks with relative strength and sell the short strike below major technical support. If that support is breached, buy back the spread. I am going to wait for a market pullback before we buy the SPY. Place an order today to buy the SPY at $293.20 Day traders should let the market come in this morning. The action Friday was tenuous and the market closed where it opened, giving back all of the intraday gains. This morning we are seeing additional selling and the gap from Friday is likely to fill. Watch for support at SPY $294. I like that level and I would be a buyer if we get there. The 100-day MA is just below it and that will provide additional support. Look for stocks with relative strength. This morning I will use the Heavy Buying search In Option Stalker right on the open. These stocks have unusually high-volume, liquid options and relative strength. When the market is ready to bounce they will lead the charge. I will wait for market support and then buy these stocks. We want to buy pullbacks, but we need to make sure that support holds. Be patient and watch the support levels I've outlined. . .

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