Be Patient and Look For Breakouts. Buy Calls and Keep Your Size Small

December 10, 2013

Yesterday, the market opened higher and it fell into a tight trading range. The price action will dry up the rest of the year. It is very important to have a game plan in this low-volume environment.

As I mentioned yesterday, I am not engaged at this level. If I see a breakout above SPY $181.75, I will buy some calls. If not, I will wait for the market to pullback and establish support. The first level is SPY $180.50. When it is time to take a position, I will only trade 20% of my normal size. The easy money has been made.

We might get a budget proposal as early as today. Congress will soon be in recess and they need to act quickly if a budget is going to pass before the end of the year. I am not going to hold my breath, but any progress would be bullish for the market.

Next week, the Fed meets for the last time in 2013. They will not taper until Janet Yellen takes office and the debt ceiling is extended. The news that tapering has been postponed should be market friendly.

The economic news last week was strong (ISM, ADP, GDP, initial claims and the jobs report). China’s industrial production and retail sales came in better-than-expected overnight. The market needs economic growth if it is going to move higher.

Earnings season is behind us and the results were good. Stock valuations are attractive and companies are using cash to buy back shares.

Asset Managers are not worried that they will miss a year-end rally after a 25% run. They will buy dips, but they will not chase. If the market gets overextended, we can expect to see some profit taking.

The price action the rest of the year could be very boring. There will be an upward bias but the trading ranges will be established early in the day. If you are not holding long overnight positions, you will miss the move. Last Friday was a typical example. The market gapped higher overnight and it fell into a tight trading range the rest of the day.

Look for stocks that are breaking through horizontal resistance after a period of consolidation. These moves tend to be sustained and they are relatively easy to manage. Get out when the momentum stalls and place your stop at the breakout.

The bid to the market is strong. When stocks pulled back last week, they quickly recovered.

The market will probe for support this morning and the damage will be contained. First support is at SPY $180.50. If it holds that might be a nice level to buy some calls.

Be patient, look for opportunities to get long and keep your size small.
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