Earnings and FOMC Will Attract Buyers – Sell Bullish Put Spreads This Week

Posted 9:30 AM ET - Last week the SPY dropped to the low from August ($182) and it bounced. We saw follow-through buying the last two days and this marks a capitulation low. January is typically a very bullish month and heavy selling has me treading cautiously. I still believe we might see an aftershock and I hope that happens today. Ideally we will pull back below horizontal support at SPY $187.50. The market could fall below that level and shake out bullish speculators. Once that low is established, I want to see a swift snapback rally. If this happens, I would feel much more comfortable getting long. This price action would tell me that buyers are still engaged and the SPY would establish a higher low. On a longer-term basis, the market has deteriorated technically. It looks like the S&P 500 has "crowned". We need to treat this rally as a bounce and nothing more. We should get a couple of weeks of decent price action. Earnings season will crank up this week and we will hear from Apple, Amazon and Microsoft. These stocks performed well last year and they need to lead the rally. The strongest companies announce early in the earnings cycle and optimism should build this week. The FOMC will release its statement on Wednesday. Given the global market decline, their rhetoric should be dovish. Flash PMI's will be posted tomorrow, but China no longer provides this data. They will post their official PMI next Monday. China's economic numbers have been better than feared, but the market doesn't trust the releases. From my perspective, they should be decent enough to prevent further selling. There have not been any recent defaults in China’s shadow banking industry and that is critical. If they start to surface, global markets will tank. Given my longer-term bearishness, I have to play this bounce with caution. I sold out of the money bullish put spreads last week. This strategy allows me to distance myself from the action and I can take advantage of time decay. I will also take advantage of declining option implied volatilities. This is my primary swing trading strategy. I will sell more bullish put spreads this week after strong earnings announcements. I will avoid energy and basic material companies. The key to this strategy is to make sure that the short strike price is below technical support. If technical support is breached, buy back the spread. If the market breaches technical support, buy back the spreads even the stocks are holding up well. I am also day trading from the long side. I have been more aggressive on days when the market opens lower. Strong stocks stick out like a sore thumb and I wait for market support to be established. Once the market stops going down, these stocks take off. When the market gaps up (Thursday and Friday) I have to be much more careful. These opening rallies typically fail and a great deal of patience is required. It is much harder to spot the "real McCoy's" when the market gaps up. Watch for a nice little dip this morning. Ideally, we will find support and quickly rally above $187.50. That price action would give me more confidence to trade from the long side. Look for opportunities to sell out of the money bullish put spreads this week and day trade from the long side. . .

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