Market Will Probe For Support. Still Some Downside – Get Ready To Sell Put Credit Spreads

May 9, 2012
Author: Peter Stolcers, Founder of OneOption
Author
Pete

Yesterday, the market tested the downside early and it found support at SPY $135. That was just above the 100-day moving average and buyers stepped in. Throughout the day, stocks clawed their way back and a late rally pushed the SPY back above $136.

A reversal like that typically follows through the next day. This morning, the market gaped below support at SPY $136 and that tells me it has more work to do on the downside. The 100-day moving average is getting tested ($134.70) as I write my comments.

Overnight, stocks in Europe declined as credit concerns escalated. Interest rates in Spain and Italy are pushing higher and that is a warning sign. Analysts believe that Spanish banks will need €30 billion in aid.

Greece is always a concern and pro-bailout politicians are losing their luster. New leaders could rescind austerity agreements with the IMF and jeopardize bailout money. This would send Greece into instant default.

There really hasn’t been much news overnight. US economic releases were soft last week and that “bad taste” is still in our mouth. Without any new information to trade off of, the momentum currently points lower.

Tonight China will post its trade balance. Last month it was slightly better than expected. The results need to be good. China is the last pillar of strength. Consequently, I believe that we are set up for disappointment. A fair number will not be good enough, it needs to be great.

Tomorrow, initial jobless claims will be released. They declined last week and traders will be looking for signs of strength. A low number could mean that the warm weather distortion has finally run its course and that job growth will stabilize. If initial claims come in above 365,000, the market will pull back.

Europe is wearing us all down, but we have to get used to it. The problems run deep and there are new bond auctions every week.

Earnings season is winding down and the releases are not carrying much weight. The focus will be on the economy and Europe.

If the market closes below the 100-day moving average today, it will spark a new round of selling.

I don’t believe the news is that devastating. Asset Managers are not aggressively buying stocks. They will wait for support and then they will step in. That means the bid is light and technical selling can continue for a few more days.

I am not selling any June put credit spreads yet. I am very happy to be on the sidelines. Once the 100-day moving average is tested and it holds, I will gradually add positions. I would also like to see support at SPY 134 tested.

On a short-term basis, I am shorting stocks (day trading). I established positions early yesterday and I set my stops below my entry price so that I was guaranteed a profit if the market reversed. It did and I made a little money. I am using the same tactic today. Stocks have drifted lower. I am not using a trailing stop because I feel that one of these times I will get the downside follow through I am looking for. It could be today.

The price action is very choppy. If stocks can’t make a new low by midday, we will rally back. On the other hand, if the selling pressure persists and we make a new low this afternoon, we will see heavy selling into the close.

The news is not good, but it’s not devastating either. I am seeing great stock valuations and I am anxious to sell out of the money put credit spreads. Option premiums are on the rise and I can distance myself from the action. I still want to see how much damage this wave of selling can do. I might only be a day or two away from selling some put credit spreads.

Be patient. A really good training opportunity is just around the corner.
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