Big News Over the Weekend – Upside Greater Than Downside
Posted by Pete Stolcers on October 18
The trading volume this week has been dismal. Traders are waiting for the next market moving news and earnings releases have kept buyers mildly engaged. The results have been good, but valuations are a bit stretched at a forward P/E of 17. Swing traders should protect profits in their bullish put spreads, many of which will expire today. We will wait for the next market dip and reload.
The daily chart from the beginning of the year reveals that light volume near the all-time high has been bearish. Asset Managers do not want to chase stocks at the upper end of the valuation range so the activity dries up. I don’t know what the catalyst might be for the next drop and I don’t care. Pullbacks to the major moving averages are buying opportunities.
The intraday action has been challenging. Major market moves run their course in the first 90 minutes of trading and then the market compresses. On days when there is no momentum we can expect the close to be very close to the open (doji candle). Fortunately, earnings season has started and that will provide plenty of opportunities for the next few weeks.
The US and China may sign a mini deal in November. I have to laugh at the notion that this might be called a trade agreement. The US will delay future tariff hikes in exchange for agricultural purchases from China and a promise not to steal intellectual property. Call it what you will, the market will like the news. We are within striking distance of the all-time high and a truce will reduce uncertainty.
China needs to purchase US agricultural products for its own sake. Consumer prices were up 3% last month and much of that was driven by food. The Senate will vote on a bill that supports pro-democracy protests in Hong Kong and hopefully that will not impact this “watered-down deal”.
The UK and the EU have agreed to a Brexit deal. It will be voted on by Parliament tomorrow and the vote will be very close. Theresa May had an agreement with the EU and she couldn’t get it through Parliament. If there is a Brexit agreement the market will rally. This will remove a lot of uncertainty. If the vote does not pass there will still be time before the January 31st deadline. I view the upside potential to be much greater than the downside risks over the weekend. Boris Johnson will lobby the workers union. It is critical to the outcome and rumor has it they will vote no.
Earnings season is off to a good start. Buyers are typically engaged through mega cap tech stock earnings. Apple is one of the last to report (October 30th).
There will be plenty of “Fed speak” today and traders will be expecting dovish remarks. This should be positive for the market today.
Swing traders should be greatly reducing their risk today as many out of the money bullish put spreads expire. Manage profits on your remaining bullish put spreads and use a stop of SPY $296 on a closing basis. On the next market dip we will reload. If you are trading earnings and you want to hold a few overnights this weekend I believe the market should open higher on Monday. Option Stalker has a search called Strong After Earnings and I suggest focusing on these stocks. There are a number of characteristics that make these stocks particularly attractive. Use the opening price after earnings as your stop.
Day traders should focus on the long side. I believe that “Fed speak” will be bullish and there might be some buying ahead of the Brexit vote. The volume is been extremely light this week and we’ve seen a number of dojis on the daily chart. This is a low probability environment and you need to focus on stocks with heavy volume and momentum. Use the Heavy Buying search in Option Stalker early in the day. Look for two consecutive long green candles with closes near the high of the bar stacked one on top of the other. These are excellent candidates. Yesterday we caught a beautiful short in NFLX right out of the gate in the chat room. The second five-minute candle was a long bearish engulf and the stock never looked back. We don’t have market momentum or volume we need to zero in on these stocks and patterns.
Look for a relatively quiet day with a positive bias. The overnight news from China (industrial production, retail sales and GDP) was largely in line.
Content is provided by OneOption, LLC, which has no affiliation with Regal Securities, Inc. (“Regal”) This commentary is provided for information purposes only, and is not a recommendation, offer or solicitation by Regal to buy or sell securities or to adopt any investment strategy. Regal has not participated in the creation of the OneOption content and does not directly or indirectly endorse the content. Any reliance on this material is at the sole discretion of the reader.