Daily Commentary: July 07, 2020

Jeremy Engelbrecht1Option Commentary

Market Wants To Grind Higher – Here Is Our Options Trading Strategy [Next 6 Weeks]

Posted by Pete Stolcers on July 07

Yesterday the SPY rallied above horizontal resistance at $315.65 and the QQQ made a new all-time high. Last week’s economic numbers were excellent and ISM services came in at a very robust 57.2 Monday. Earnings season will begin next week and that typically attracts buyers. Look for positive price action for the next few weeks.

China’s market rallied more than 5% yesterday and they have a two month head start on the rest of the world since their shutdown ended in April. Their economic releases have been decent, but consumers are still cautious. Last week we learned that the Dragon Boat Festival attracted 49% less attendees and revenues were down 69%. This still indicates a sluggish consumption.

The Coronavirus is spreading in the US and states that have postponed Phase 4 or that have gone back to Phase 3 account for 40% of domestic GDP. The recovery will take longer than expected and another round of stimulus is being negotiated. Democrats want to extend unemployment benefits (PPP) and Republicans want to make one time payments to workers ($1200). Last week the PPP was extended to August 8th and there will only be $120 billion of unused stimulus at that time. Regardless of which path we take, the helicopter drop continues.

Major economic releases are behind us and we still have two weeks before earnings crank up. These are the dog days of summer and we can expect choppy, light volume conditions.

Swing traders should look for opportunities to sell out of the money bullish put spreads. Option Stalker has a search called “Buy into Earnings”. It looks for stocks that have rallied into the earnings announcement once they are inside of a two week window more than 75% of the time in the last three years. This is a significant statistical edge and we will sell out of the money bullish put spreads below technical support on these candidates. The stock doesn’t have to go higher; it just has to tread water (in some cases it can move slightly lower). These bullish put spreads will expire in less than two weeks and we can continually roll into new positions. After the companies have released earnings we can use a second search called “Strong After Earnings”. This search looks for stocks that have recently posted results (in the last two weeks) and that have been strong after the number. These are also excellent bullish put spread candidates. We need to tread cautiously while the market searches for direction and this is our game plan for the next 6 weeks. Tech giants post results early in the earnings cycle and the market bid should remain strong.

Day traders need to watch the low from Monday. The market is poised to open above that level and that support is likely to be tested. As long as it holds, trade from the long side. If the low from Monday fails, we will fill in some of the gap and you need to be patient with your longs. If we make a new low after the first two hours of trading we will have a bearish trend day (unlikely). Down opens have provided us with the best day trading opportunities. Relative strength is easier to spot and the early dip gives us a chance to join the current upward momentum. I will be looking for opportunities to get long this morning and I feel that the path of least resistance points higher.

Resistance is at $317.50 and $323.40. Support is at $315.50 and $311.50. Expect a choppy grind higher on light volume this week.

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