Friday’s Stock Option Trading Strategy!

The market really hasn't given us much to look at today. It is expiration and most of the firepower was exhausted earlier in the week. I do not like the price action I see and there are some legitimate concerns. If I compare this decline to the one we had in March and August, this one has a methodical feel to it. The others were fast, furious, deep declines that quickly rebounded. This one has taken its time to unfold and that is a dangerous sign. There are many red bodied candles in the last two weeks of trading. That indicates that the market opens near its high and closes near its low. That is also a very bearish trading pattern. Another concern came after Tuesday's monster rally. When prices rallied Wednesday, they quickly lost their momentum and by the end of the day a full-blown reversal was in place. That bounce was all short covering and the bears were quickly able to suppress it. The SPY 146 support level is in jeopardy and if it falls, a double top formation is in place. The resistance at the all-time high level is mounting and it will be difficult for the market to challenge that level with all of the uncertainty in the marketplace. Massive lending write-downs, higher oil prices, a weak dollar, inflationary pressures, decreasing earnings growth rates, and an election year are creating a strong headwind for this 5-year rally. Next week will be very quiet. There are only a handful of economic releases and the earnings calendar is light as well. I have shifted my bias from bullish to neutral. The chances for a year-end rally are diminished as uncertainty has overpowered this seasonal pattern. From a trading standpoint, it means that we need to trade relative strength and weakness. It will be important to carry both bullish and bearish positions. The implied volatilities are high and this is a time to sell out of the money put credit spreads and out of the money call credit spreads respectively. Distance yourself from the action and keep your size small. The market is transitioning and it is difficult to predict which way it will go. If a trend establishes itself, we will be able to get more aggressive. I have been mentioning to exit your long positions if the SPY 146 level did not hold. Shift to a neutral bias and look for premium selling opportunities. If you trade stock, look for short-term day trading opportunities from the Live Update page. Once the market establishes early momentum, it tends to continue in that direction the rest of the day. For today, look for choppy trading. There is a chance for a sell off near the bell. Fridays have been weak and traders do not want to go home long.

Daily Bulletin Continues...