S&P Rallied 100 Points From the Low Fri – Market Will Rest and Hold the Gains

Posted 12:30 PM ET - Friday the market sold off after a weak jobs report and it found support above the low from Wednesday. A double bottom pattern has formed at SPY $187.20 and we witnessed a sharp reversal. The price action yesterday was bullish and we've rallied 100 S&P points from the low on Friday. Prices are overextended and the market will take a breather today. Earnings season will kick off on Thursday, but the major releases won't start until next week. The FOMC minutes on Thursday won't mean much. Fed officials will change their tone after the dismal jobs report (149,000). As much as they want to hike in 2015, they won't. Holiday shopping is about to kick off and they don't want to dampen spirits. Chinese stocks have been inching higher and a base has formed. The PBOC has done everything it can to stabilize prices and the price action should be bullish for at least a few weeks. Their stock market has been closed all week and it will reopen tomorrow. Domestic economic releases have been decent. ISM manufacturing was a little soft and ISM services was good. Asset Managers have identified firm support at SPY $187.20. They have been waiting to buy a dip and the bid will strengthen into earnings season. Stocks are attractively valued relative to bonds. P/E ratios are more reasonable at this level and I am expecting choppy price action with a bullish bias the next few weeks. I believe the market will grind up to the top of this range (SPY $202). I sold bullish put spreads two weeks ago and I continued to scale in last week. As I mentioned, this was the only sensible overnight strategy given the market volatility. I knew that once support was established, the market would rebound quickly. These trades are in excellent shape. I am also short VXX and that trade is working out well. I believe option implied volatilities will contract in the next two weeks. Yesterday, I bought some deep in the money calls the trade with a Delta above .80. This is a surrogate stock position and I'm able to use options for leverage. This is a relatively small portion of my trading. I don't believe we are going to see an explosive move higher and that is why I did not buy many calls. I feel like I will be able to catch the remainder of this move by day trading. I have 4:1 leverage intraday and stocks are much more liquid and options. I can take my profits each day and minimize my overnight risk. All of my trades share a common pattern with four elements. I look for price compression, a horizontal breakout, a buy signal for my trading system and heavy volume. When these characteristics are present, the probability of success is extremely high. I use this approach for my Investor products and we make money trading it every day in my chat room. Look for choppy price action today. The downside will be tested, but the damage should be relatively contained. I am expecting the market to close around SPY $198 this week and it should be able to hold the recent gains. . .

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