Tuesday the market probed for support and it found it just above the 50-day moving average. Aggressive buying fueled a nice reversal two days ago and we saw follow through yesterday. Traders are completely focused on bond yields and the $1.9 trillion stimulus bill that will be voted on by the House tomorrow. The upward sloping channel is still intact and we are seeing decent volatility inside of that range.

The big drop in US 10-year Treasuries (TLT) yesterday looked like a capitulation low. Bonds bounced and they closed near their high of the day. This morning we are seeing another round of heavy selling and the TLT is below the low from Wednesday. Consequently, the S&P 500 is down about 16 points before the open.

Traders are pricing in a robust economic recovery and they believe that interest rates will move higher even though the Fed has stated that they will not tighten until employment improves considerably. This morning, initial jobless claims were much better than feared (730,000 versus 835,000 expected). The economic numbers have been solid and next week we will have major releases.

The $1.9 trillion stimulus bill is gaining traction in Congress and some of that money will find its way into the stock market.

Two weeks ago I felt that the table was set for a market melt up and now I don’t believe we will see that level of enthusiasm. The upward sloping trading channel is gradual and that gives it “staying power” compared to a steeper channel. The market looks poised to grind higher as profits grow and valuations normalize. This process will take time and when stocks get overheated we can expect profit-taking. We can also expect aggressive buying when the market drops. These offsetting forces will preserve the upward sloping trading channel.

Swing traders should focus on selling out of the money bullish put spreads on stocks with relative strength and heavy volume. Timing is a little more critical these days and you have to patiently wait for those market dips. Option implied volatilities are at historic lows and the VIX/VXX can’t get off the deck. This tells me that institutions don’t believe that we will see a correction anytime soon. From a trading standpoint it means that we have to sell premium closer to the money and that a small drop in the market/stock could be problematic. This is why you have to use a little timing and you have to wait for those market dips. I believe that this will be a good entry point for selling out of the money bullish put spreads. Tech stocks are selling off and there will eventually be some bargains. Focus on sectors (basic materials, travel and financials) that are currently in favor. PopBull and Bullish Flag are two excellent Option Stalker searches that will help you find good candidates. I like selling out of the money bullish put spreads because we can take advantage of accelerated time decay. It is much more difficult to buy calls when we don’t have strong market momentum because time decay is constantly working against you.

Day traders should wait for market support. I love down opens just like the one we had yesterday. Relative strength is easy to spot and once the market bid is established, these stocks take off. Heavy Buying and Relative Strength 30 are my go to searches on the open. With the stimulus bill looming I believe that the early dip this morning will be brief. Use 1OP as your guide for the market and wait for a bullish cross off of a deep trough. That has provided us with excellent entry points.

Support is at SPY $389 and $385.80. Resistance is at $392 and $394.