Look For a Choppy Grind Higher – SPY Should Close Above $202 This Week

October 12, 2015
Author: Peter Stolcers, Founder of OneOption

TAKE THE 1 WEEK FREE TRIAL AND WATCH ME MAKE MONEY Posted 9:40 AM ET - The market staged a huge rally off of SPY $187.20 last week and a double bottom pattern has formed. Most of the move happened in a 24-hour period and Asset Managers who balked missed the move. They were hoping for a retracement and it never happened. As the week progressed, they got more anxious that they might miss a year end rally and they started bidding up stocks. The SPY rallied above $200 and that is a support level we can lean on. I am expecting choppy price action this week with an upward bias. J.P. Morgan and a host of other major banks will post this week. Results should be fair, but the financial sector will not move much. A rate hike in 2015 looks less likely. Intel will post results Tuesday. PC sales are way down in Q3 and they will have to make up ground in mobile chip sales. China will post economic releases Tuesday night (trade balance) and Thursday night (industrial production, retail sales and GDP). The trade balance numbers will be weak and that could weigh on Chinese stocks overnight. The numbers Friday morning will be market friendly. China's economy is not falling off a cliff and their market has stabilized. We should see a nice bounce that lasts a few weeks in China. The Fed is not likely to raise interest rates in 2015. They do not want to dampen spirits into the holiday spending season and economic conditions are not strong enough to justify liftoff. Republicans don't have a replacement for Boehner and he will remain Speaker of the House. He wants to raise the debt ceiling and he will be able to get that done in the next few weeks. This is market friendly. Bond yields are near historic lows and equities are attractive on a relative basis. The recent market pullback was lowered P/E ratios and there is room for a nice little rally. I sold out of the money put credit spreads a few weeks ago and I will buy those positions back for pennies this week. I will lock in profits, release margin and reduce risk in doing so. I will look for opportunities to sell out of the money put spreads after earnings releases. I am also short VXX. If the market simply treads water this week, option implied volatilities will decline and this position will benefit. I am short in size at $25.25 and I will start closing the position down around the $20 level. I am also long deep in the money October calls. They're trading at parity and I did not buy time premium. I wanted options that traded at a high Delta and I focused on stocks that were breaking out. This is a relatively small percentage of my overall allocation because I feel that I will be able to day trade and catch the rest of this rally. Strong markets tend to open on the low and close on the high. Stocks get a little overextended into the close and this pattern repeats. Consequently, I can use 4:1 intraday margin to leverage stock positions. My overnight risk is low and stocks are more liquid than options so I can get in and out with ease. If you aren't able to day trade, sell out of the money put spreads on strong stocks. Also consider buying a handful of deep in the money calls the trade at parity. Option premiums are still rich and I would discourage you from buying out of the money calls. Look for a choppy grind higher this week. We should be able to close above SPY $202. Asset Managers will get nervous ahead of mega cap tech stock releases and I believe we will challenge SPY $205 before Apple posts. Dips will be brief and shallow. Stay long and manage profits. . . image

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