Enjoy the Ride. Rebound Still Has Room To Run. Set Stops and Targets

Stocks found support Monday and a hard bottom has been established. The low of SPY $157.00 should hold throughout the summer and the market will trade in a range between SPY $157 and $168. The rebound continues today and the SPY is above the 100-day moving average and horizontal support at $159. Stocks are extremely oversold and we should grind higher into next week. The economic releases have been light. Durable goods came in better-than-expected and GDP was a little soft today. Germany posted better-than-expected economic data and Europe traded higher. The big news will hit next week (ISM manufacturing/services, official PMI's, ADP, initial claims and the Unemployment Report). I believe the results will be better than feared. Once the market drifts back into the middle of the trading range we will chop back and forth. European credit concerns are relatively low and I am not expecting a great deal of volatility. The market will form lower highs and higher lows. This will result in a wedge formation. Trading could get boring in August. Economic activity will determine the breakout from the wedge and this will take a couple of months to set up. If conditions improve, the market will rally. If activity is sluggish we will test the downside. I don't want to get too far ahead of myself. At this juncture, you should be long. I've been telling you to buy calls since Monday and if you followed my advice you have nice profits. I would not be adding to call positions. You should have a full position on and it's time to shift into profit management mode. As I've been telling you the last few weeks, the action will be choppy. You have to buy on weakness and sell on strength. Directional moves will be short term in nature (3 to 4 days) and you need to set targets. The Fourth of July holiday will impact trading. I believe ADP will set the tone on Wednesday and the employment news will get priced in. Traders will be off Thursday and most will take Friday off as well. The Unemployment Report will generate activity for about an hour and then the volumes will fall off dramatically. Now that a hard bottom has been established, Asset Managers will bid for stocks. Shorts will get squeezed a little and the market will grind higher. This rebound should last through next Wednesday, but the momentum will start to wane. We have an excellent entry price and that gives us staying power. I will use the 100-day moving average as my stop. Passive accounts can use a close below SPY $159 for a stop. I want to give this bounce a little more breathing room and I am willing to keep my stop fairly wide. I plan to exit my call positions if the market rallies up to SPY $162. If we don't get there before the close Wednesday, I will exit then. Option implied volatilities were elevated and this rally has crushed premiums. If not for major news releases next week, the collapse in IV would be even greater. Once the ADP news is out, implied volatilities will contract. Put credit spreads will work well here. I want to enjoy my holiday so I plan to be flat by the close next Wednesday (or before if target profits are reached). If you are long, enjoy the ride. There is still room to run. . .

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