The market pulled back sharply last Monday and a hard bottom was established at SPY 157. Stocks rebounded sharply and we were back above the 100-day moving average and horizontal support by the end of the week. You should be long calls and you should be getting ready to take profits.
The price action was a little soft Friday and that is natural given the big move off of the low. This morning, Friday’s losses have been erased and the SPY is above $162. This is my first target and I will exit some of my call positions. I still believe we can get to SPY $164 this week. After that, this bounce starts getting a little stretched.
ISM manufacturing and Chicago PMI were a little soft. Economic releases will be better than feared this week.
ISM services and ADP will drive the market on Wednesday. Most traders will lean on these numbers and they will square up. They will take Thursday and Friday off and trading volumes will decline dramatically.
There might be an hour of active trading Friday morning, but the price action will settle down very quickly. If the jobs report Friday is between $150K and $180K, we might not even see a reaction.
I will be exiting my call positions on Wednesday if targets are not reached. Once ADP comes out, stocks will adjust and implied volatilities will decline. I have fantastic profits and I do not want to see them slip away over a pseudo-four-day holiday.
The market is grinding higher today and we should see a little follow-through. I will sell a quarter of my calls near the close today.
When we come back next week, earnings season will be at our doorstep. Guidance will be critical and traders will be searching for signs of economic growth.
We still have a little more upside before prices get stretched. Scale out of call positions and reduce risk heading into the holiday weekend.