Swing Traders: Start Scaling Into Nov Call Positions If SPY Closes Above $170 – Add If SPY Above $17

September 24, 2013

Last week the Fed surprised traders when it postponed tapering. The market surged to a new all-time high and we’ve been selling off ever since. The SPY is back below the breakout at $171 and bullish speculators are getting flushed out.

Asset Managers will not bid aggressively until the debt ceiling is resolved. The political rhetoric needs to improve. We could hit an air pocket on light volume. It will result from a lack of buyers, some profit taking and selling by bullish speculators. The SPY could test support at the 100-day moving average ($166) and that dip will be very brief if it happens (might only be an intraday low).

This wave of selling should run its course in the next few days. If we do not hit an air pocket, the market will start to move higher.

The House passed a bill to extend the debt ceiling if Obamacare is defunded. On Friday, the Senate will vote and they will reject it. They will return the bill to the House and it will include Obamacare. This volley will continue.

I am day trading from the long side today and I took profits on my put positions this morning.

The macro backdrop is very bullish and I’m looking for an opportunity to get long. I hope we make it down to $166 so that I can enter at a good price.

Flash PMI’s in Europe and Asia came in better-than-expected. Angela Merkel fared well in Germany’s elections and she has supported EU bailouts. The Fed remains accommodative and Janet Yellen is likely to become the next Fed Chairman. These are bullish events.

Domestic economic activity is on the rise and corporate profits are healthy due to cost-cutting. Cash flows are at record levels and companies are using proceeds to buy back shares. Any uptick in demand will go straight to the bottom line.

Seasonal weakness is winding down and the end of the quarter is approaching. We should see some window dressing next week and some end of the month fund buying. Earnings season is only two weeks away and there have not been many warnings.

Asset Managers want to front run a year-end rally and the bid will strengthen after this week. The market simply got ahead of itself last week and some of the froth has been removed.

I am prepared to get long and I believe we will have a nice year-end rally. The banter in DC will continue, but the can will get kicked down the road at the last minute.

I might consider buying November call options if the price action looks good today. I want to see a gradual grind higher. I’ll keep my size small knowing that I am early and I might take a little heat on my positions over the next few days.

If we do challenge the 100-day moving average, I will view that as an opportunity, not a setback. I am also prepared to add on strength and I will buy more calls if the SPY closes above $171.

If you are an aggressive swing trader, gradually scale into November call positions. These options will span earnings season and the implied volatilities will hold up. That means you won’t be as exposed to time decay if the market needs a little more time to consolidate.

Your ideal candidates are in a strong uptrend and they have recently broken through horizontal resistance. During the recent market pullback, they have maintained the breakout and they are starting to recover.
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September 23, 2013
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