Yesterday the S&P 500 shot higher and it almost challenged the high from June 8th. The NASDAQ 100 made a new all-time high and tech stocks were leading the charge. Two hours before the close a heavy round of selling pushed stocks below the opening gap forming a bearish hammer on the daily chart. This price action should serve as a warning and I am urging you to be very cautious. Earnings season will keep a bid to the market, but we are likely to see profit taking in August.

When I looked at the Option Stalker searches yesterday I noticed that many stocks have gone parabolic. Tech stocks are overextended and this trade (stay at home/work from home) is very crowded. The last leg of this rally has been heavily concentrated in a handful of tech giants and this is not a healthy sign.

Earnings season has started. J.P. Morgan Chase posted solid results and Wells Fargo reported a $2.4 billion loss (it slashed its dividend to $0.10). Banks will dominate the early releases and better than feared results might help them tread water. Unfortunately, a sluggish economic recovery will result in bad loan write-downs and a 0% interest rate environment will make it difficult for banks to make money. Tech stocks will start reporting in a week and the market bid should remain strong heading into those numbers. Apple is the last tech giant to report (July 30th). Sellers will be more aggressive after tech earnings have been released.

The economic news is fairly light. Singapore just reported that Q2 GDP declined by 12.6% (Y/Y) and by 41.2% (Q/Q).

The Coronavirus is spreading and the economic recovery will take much longer than expected. States that are in Phase 3 account for 40% of US GDP. We can expect additional quantitative easing by the Fed and additional government stimulus.

Swing traders should be very selective in selling out of the money bullish put spreads. Reduce your trade count and your size. Our goal is to generate income in this low probability trading environment. Don’t sell out of the money bullish put spreads on stocks that have gone parabolic. When profit-taking sets in, they will be nailed hard. I would also avoid expensive stocks that are over $200 in price. If the market drops the option bid/ask spreads will widen dramatically and it will be almost impossible to determine where you can buy the spread back. I also like selling spreads where the strike prices are less than $2.50 apart. If we have to leg out it will be easier to do so and the long puts will have a fairly high delta. Provided that all goes well the rest of the week, we will only have three bullish put spreads and they expire on July 24th. When the selling comes, some traders will feel that they can quickly adjust their risk. Option premiums will balloon and the spreads will be extremely difficult to reel in. I plan to be on the sidelines. Instead of managing losses, I will be looking for opportunity. You still have one more week to adjust your risk. Don’t waste this opportunity.

Day traders should look for an opportunity to short early in the day. The market will not move higher until the bid has been tested. That was an extremely heavy round of selling that we saw yesterday and buyers will be passive until they know that support has been confirmed. A bearish trend day would be concerning. After the first hour of trading we will have a better sense of direction. I believe that we will see two-sided trading and decent price movement. We will use the 1OP indicator as our guide.

Support is at $310 and resistance is at $317.50 and $322.70.