Market Close to All-time High – Resistance Will Be Strong – Rally and Reversal Possible

Option Trading Strategy - Today's options trading strategy is to day trade the SPY using the one hour range. If the market is above the high, I will buy in the money February call options and I will keep a tight stop. If the market is below the one hour low, I will buy in the money February put options. This is only a day trade and I do not want to hold overnight positions. If the market can stay above the 100-day moving average next week, I will sell some out of the money bullish put spreads. In the right margin of my blog, you can sign up for free video course that explains this options trading strategy. This rally feels nice, but the market technicals have deteriorated in the last few months and I want to make sure that buyers are engaged. It's hard to believe that one week ago the market was testing the 200-day moving average. The S&P 500 has rallied 70 points in four days. This rally feels good, but as you can see in the chart, the trading volume is low. The news has been fairly negative this week and the strength of the bounce is rather surprising. Greece has been in the headlines so let's start there. Wednesday, the ECB said that they would not accept Greek bonds as collateral. This means that banks cannot pledge these assets and they will be less likely to buy Greek bonds in the future. This will make it harder for Greece to raise capital. The new leaders in Greece have stated that they are going to fight fiscal constraints and this was the ECB's way of showing who is in control. Greek leaders need to tone down the rhetoric so that they can secure a major loan that is scheduled in the next few weeks. This dark cloud will loom over the market entire year. Stocks were able to shrug this news off yesterday and the market staged a huge rally. The economic news has been disappointing as well. China's official PMI came in below expectations and HSBC's PMI calculation hit a six-month low. The PBOC lowered bank reserve requirements by 50 basis points and many analysts believe another move will come shortly. Every province in China missed GDP estimates. Stable growth in China is the key to the market in 2015. Economic conditions in Europe have improved slightly. The ECB fired its bazooka and investors are hoping that it will stimulate economic growth. Domestic activity has stumbled. Durable goods orders, GDP, ISM Manufacturing and ADP missed estimates. ISM services came in slightly better-than-expected and January US auto sales hit an all-time high. The Unemployment Report was released and 257,000 new jobs were created in January. This number was strong and prior months were revised upward as well (100K+). Traders will be nervous ahead of the next FOMC meeting. Hourly wages did increase, but that was because 20 states increased their minimum wage. This will impact Q1 profits. Earnings season has been fairly good. Two thirds of the companies have reported and 70% have exceeded estimates while 17% have missed. Guidance has been cautious and a strong dollar could impact exports. The price action since October has been weak. We've seen light volume rallies and heavy volume declines (distribution). This is a sign of profit-taking. Buyers are interested at the 200-Day MA and profit takers are reducing risk at the all-time high. The market is trapped in a range and we are bumping up against major resistance. Earnings season has peaked and the economic news will dry up next week. We might make a run at the all-time high, but the volume will be light. I am going to stick with day trading for a few more days. The technicals are weak and I don't want to buy calls. I will keep my distance and sell out of the money puts. This option trading strategy gives me a little breathing room and I can take advantage of time decay. We've seen sharp declines in recent weeks and one bad news item could send us below major support at SPY $198. I attribute this rally to central bank easing (even though QE is not working), short covering, decent earnings and a lack of attractive investment alternatives. We are in a “plug your nose and buy” environment. I would be surprised to see a sustained rally today. The market spent a lot of energy getting here this week and we are bumping up against major resistance. I would NOT be surprised to see a nice rally and a reversal. I will be day trading today and I will wait until Monday before I start taking overnight positions. . .

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