Daily Commentary: December 03, 2020

Jeremy Engelbrecht1Option Commentary

This Is the Current Market Pattern and This Is How You Should Trade It

Posted by Pete Stolcers on December 03

Yesterday the S&P 500 made a new all-time closing high. The headwinds are fairly stiff, but seasonal strength is fueling a gradual grind higher. As long as the market does not make any big moves higher, you don’t have to worry about heavy profit taking. We should expect normal corrections within this move higher and I believe SPY $360 support will be tested in December.

Politicians shot down a bipartisan $900 billion stimulus proposal, but at least they are talking. This is considerably less than the $1.8 trillion to $2.5 trillion that was being discussed before the election. The market is still expecting a stimulus bill of some sort in the next month, but investors were not discouraged by yesterday’s news.

The Senate runoff in Georgia will happen in January and a Republican victory is priced in. This would be a market friendly outcome and it would make it difficult for Democrats to repeal the Trump tax cuts.

ISM manufacturing was strong earlier in the week (57.5), but ADP was soft (307,000 versus 380,000 expected). Initial jobless claims fell this week to 712,000 (70,000 less than last week), but I would caution any optimism. Unemployment applications typically fall during a holiday and I believe that is in play right now. Tomorrow’s jobs report should be a little soft and analysts are expecting 650,000 new jobs. The latest surge in the Coronavirus will weigh on economic activity. ISM services will be released today 30 minutes after the open.

Experts believe that 100 million people in the US could be vaccinated by the end of February and that would greatly reduce the impact of the virus. Investors are looking forward and they have turned a blind eye to the current spike in hospitalizations.

It will take time for the economic recovery to gain traction. Stock valuations are very rich and profits will take at least six months to catch up. That means that normal market pullbacks within a bull rally are likely after big moves higher. This is a three steps forward, two steps backwards process. Bond yields are at historic lows and they don’t keep pace with inflation (negative real returns). This makes stocks attractive on a relative basis and investors are prepared to “ride out this virus storm”.

Swing traders are long 1/2 position of SPY and we will hold without a stop or a target. The best options trading strategy in this environment is to sell out of the money bullish put spreads. Last night I highlighted 4 new trades in my Weekly Swing Trading Video that I recorded for 1Option members. I will make that video public on YouTube Saturday. Each week I use Option Stalker searches to find stocks with relative strength, heavy volume and technical breakouts. We sell the bullish put spreads below support and we sell options that expire in 3 weeks or less. This allows us to take advantage of accelerated time premium decay and we can continually monitor changing market conditions. Our success has been fantastic this year and there is no need to change course.

Day traders can look for relative strength early today. The market is been able to hold the gap from Tuesday and that is a bullish sign. Favor the long side and look for stocks with heavy volume and relative strength. Heavy Buying will be my go to search on the open today. I don’t believe that we have to worry about a big market pullback on the open. Look for stocks with consecutive long green candles closing on their high (5 minute chart) in the first 30 minutes of trading. These will be your best prospects especially if they blow through the prior day’s high. The price action has been relatively compressed this week so set passive targets and reload on dips. As long as the SPY stays between $364 and $367.50 we can expect relatively dull intraday action.

Support is at SPY $364 and resistance is at $367.50.

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