Market Will Make A Higher Low – Wait For That Pattern – Then Sell Bullish Put Spreads

January 26, 2016
Author: Peter Stolcers, Founder of OneOption

Posted 9:30 AM ET - The market tanked last week and it tested support at SPY $182. That was the August low and we saw a sharp intraday reversal on heavy volume. A major support level has been established and prices should stabilize. We've seen very heavy selling the last three weeks and I mentioned in yesterday's comments that an aftershock was likely. Stocks tried to move higher yesterday, but late day selling pushed us down to SPY $187.50. That is a horizontal support level and it held. I still feel that there is more work to do on the downside. Global markets were weak overnight and the early rally today will fade. Ideally, we will hit an air pocket and snapback. That price action would be a sign that Asset Managers are buying dips. A higher low would be established and that would give me more confidence to get long. Earnings season is in high gear and the results should be better than feared. The strongest companies announce early in the cycle and I am expecting the bid to grow over the next two weeks. Tomorrow, the FOMC will release its statement. After a global market meltdown, I am expecting dovish rhetoric from the Fed. Apple announces after the close today and bad news is priced in (I have no directional opinion). Facebook announces after the close tomorrow and Microsoft/Amazon will post after the close Thursday. These results should be excellent and optimism will grow. The massive snowstorm on the East Coast has resulted in low trading volumes the last two days. That should change today. I still prefer to day trade from the long side. If the market makes a new low for the day, I hedge by shorting the S&P futures. This strategy worked very well in the last hour of trading yesterday. I made money on the futures and my stocks held strong. The gains from my S&P position more than offset the losses I took on my stocks. This move happened late in the day, but if it were earlier I would have taken profits on my futures and I would've let my stocks recover. Then I would gradually scale out of my stock positions and take profits. Now that earnings are ramping up, I will focus more of my trading on bullish put spreads. I want to sell rich option premium below technical support. I sold put spreads on Facebook and Amazon last week when the market capitulated and I will be buying them back (taking profits) in the next two days. I don't hold bullish put spreads over earnings announcements. Look for one more decent push lower and a nice intraday reversal. Global markets were weak, but decent earnings announcements will overpower global concerns. I am not looking for a runaway market, I simply believe that we will bounce and tread water for a few weeks. That will give me a chance to make money on my bullish put spreads. The closer we get to SPY $200, the more bearish I get. Try to take advantage of market support over the next few weeks by selling out of the money bullish put spreads. This option strategy allows you to keep your distance and to take advantage of time decay. . . image

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