Yesterday the market staged an impressive rally and beginning of the month fund buying may have fueled the move. The S&P 500 closed above critical support at the 50-day moving average and we are once again within striking distance of the all-time high. The Senate will vote on the stimulus bill and most analysts believe that a $1.4 trillion bill is likely to pass. Concerns are surfacing that the stimulus will greatly increase our national debt and that much of the spending and that this sugar high won’t lead to long-term economic growth.

Market conditions remain volatile within the upward sloping trading channel that started in November. The slope of the channel is gradual and that makes this pattern much more sustainable. This is one way that the market can bide time while profits grow and valuations normalize in the first half of the year.

China’s top banking regulator said that he is worried about several asset bubbles bursting. They include the domestic property market and overseas equity markets. This comment weighed on Asian markets.

Tomorrow ISM Manufacturing and ADP will be released. Friday we will get the Unemployment Report. Traders will be looking for a rebound in employment and because of the recent decline in bonds; good news could be bad news. I was expecting better strength in the US 10-Year Treasury (TLT) after what seems to be a capitulation low. It could be that traders are waiting for this week’s data. The market does not believe that the Fed will be able to keep its foot on the gas pedal if employment conditions improve quickly and that is why bonds have been selling off.

Initially, a rise in interest rates has a negative market impact. Assets rotate out of equities and into fixed income. Traders worry that higher yields will raise the capital cost for tech companies and the market tends to decline during the first stages of rising rates. Ultimately, rising rates and strong economic growth are good for profits. I’m not remotely worried about current interest rate levels and I believe that they have a very long way to go before they impede economic growth. The bigger issue is that the market is fragile because valuations are stretched. The economic numbers have been excellent given the backdrop and I believe that economic activity will jump as the number of new Coronavirus cases plunge.

Market conditions determine the best options trading strategy. Right now I have a neutral to slightly bullish market bias. We can expect lots of volatility within the upward sloping trading channel and that means that selling out of the money bullish put spreads on strong stocks is the optimal options trading strategy. When the market tests the lower end of the trading channel we need to enter new trades. We will let time decay work its magic and we remain passive when the market bounces and we reload on the next market drop. This process could become mechanical during the next few months. Stocks with heavy volume and relative strength make ideal candidates for this strategy. Sell bullish put spreads below technical support and try to keep the expiration date less than four weeks away.

Day traders should go with the flow. We have seen excellent two-sided action intraday and there are lots of opportunities on both sides. The market found support at the 50-day moving average and I believe that there will be a nice buying opportunity this morning once support is tested and confirmed. Spend the first 30 minutes identifying stocks with relative strength and be ready to buy. Down opens are the best set up for us. Heavy Buying and Relative Strength 30 will be your go to Option Stalker searches this morning.

Support is at SPY $385 and resistance is at $391 and $392.