Last week the SPY probed for support and it tested the $377 level a few times before finally closing below it Friday. A weak reaction to earnings from big banks dampened spirits. The market is trapped in an upward sloping channel and it should be able to float higher this week. The inauguration Wednesday will keep buyers engaged as they await the $1.9 trillion stimulus bill. Major tech companies will post earnings in the next two weeks and that will also keep buyers engaged.

The S&P 500 is up 25 points before the open this morning. We are likely to fill the gap from Friday and the bid will gradually return throughout the week.

The Coronavirus continues to spread and a new mutation is even more contagious. Vaccinations are increasing, but analysts don’t believe they will have a material impact until May.

Economic conditions are slipping and job losses are on the rise. Initial jobless claims almost reached 1 million last week and that comes on the heels of a dismal Unemployment Report and ADP Report.

Banks will continue to dominate the early earnings scene and good news is priced in. They will struggle to make money in a low interest rate environment where job losses are on the rise. Tech companies have not been impacted nearly as much by the virus because employees can work from home. In some cases, tech companies have benefited from the virus (i.e. AMZN, GOOG, FB and TWTR). I’m expecting good results and tech stocks should keep buyers engaged through January.

If the selling pressure last week made you nervous, lighten up on your positions. That was a warning. This is a low probability trading environment for swing trades and your risk exposure should be minimal. You should only be selling out of the money bullish put spreads that expire in less than three weeks on very strong stocks. This is a passive way to generate income and it gives us plenty of breathing room/time to adjust our positions. We have three spreads that will expire Friday and three spreads that will expire a week from Friday. Accelerated time decay is constantly working in our favor. We also have a “problem child” that we are trying to buy back (SPOT). We only have one spread position in February. I don’t want to add new positions at this time.

Stock valuations are extremely rich, option implied volatilities are very low, bullish sentiment is extremely high and margin borrowing on a dollar basis is at record levels. Perfection is priced into the market and surprise favors the downside.

Day traders should take advantage of the intraday volatility. Be careful this morning and don’t chase the gap higher. Wait for a market pullback or a compression. We need to make sure that the bid is strong and I don’t believe that we will see a meaningful rally until support has been confirmed. When the market dips, look for stocks with relative strength that are moving higher on heavy volume. In last night’s YouTube video I gave you a few stocks that you should keep an eye on. If they have relative strength, buy them when the market finds support. This is our normal daily routine and we use Option Stalker searches to find these stocks. Heavy Buying, Relative Strength 30 and Bull Run are my go to searches early in the day.

Support is at SPY $377 and resistance is at $381.