The markets finished up the second half of the week with a strong runup to new highs. The S&P 500 is now 3 days above its upper Bollinger Band, which over the short term is a strong overbought signal… but over the intermediate term it actually has a moderate bullish bias.
This is what it looks like when the Fed rate hike is getting priced in, the election is out of the way, and then all the money on the sidelines has to jam back into stocks.
In terms of gameplan here…
The big event coming up is the Fed meeting, and it appears that the hike is all but baked in.
My thesis continues to be that the selloff in both bonds and gold has already “baked in” the rate hike. The risk/reward on those is biased to the upside, which is why I called for selling put spreads in both assets this past Wednesday.
We also have options expiration up on deck. When we have large upside moves like this, we tend to see corrections only after the opex, as all the hedges get burned off, investors get overexposed again and will have to “re-buy” their options.
I’m well aware of the downside risk we have in the market given how some areas are overbought in the short term… but it may take a bit longer to get any kind of “fear” to come back in.
Into the end of the year, it’s not an easy short. Any corrections will most likely be short lived and rotational in nature.
The “rotational” part is where we can profit.
Look for areas where money hasn’t really jammed in (like tech), and stay away from areas that are too hot (like banks and steel).
In those “hot” sectors… well we can start anticipating a pullback in those areas if they do manage to selloff, but we haven’t seen enough of a move to justify fresh entries.
Trade #1: NFLX
After the large earnings gap from a month or two ago, any attempted selloff has been met with aggressive buyers. We’re starting to see rotation back into this name and now that the trend has changed to up, any dips should be bought.
Expected Stock Price: 109
Sell to Open NFLX Feb 100/95 Put Spread
Tier 1: Enter at 0.65, exit at .25
Tier 2: Enter at 0.95, exit at .65
Tier 3: Enter at 1.25, exit at .95
Trade #2: UNH
It’s very possible that this trade will never be filled. Maybe the stock heads sideways for a little while and then continues with some momentum and rips higher.
Yet if it does head to key support levels I want to be prepared in the event of an actual dip.
There is gap fill support just under 152.50… I’ll round down to 150 as that will act as a magnet.
Expected Stock Price: 150
Sell To Open UNH Mar 135/130 Put Spread
Tier 1: Enter at 0.70, exit at .30
Tier 2: Enter at 1.00, exit at .70
Tier 3: Enter at 1.30, exit at 1.00
Trade #3: DIS
Now this trade is a little more aggressive because we’re going with slightly shorter-term options, and it is a short.
Right now, shorting stocks is hard because the call spreads you sell are really, really close to the money.
Yet this is a clear short. It’s 2 days above its Bollinger Band as it heads into key resistance at 105.
Sell To Open DIS Jan 110/115 Call Spread
Tier 1: Enter at 0.95, exit at .40
Tier 2: Enter at 1.20, exit at 0.90
Extra risk management: Close out for a loss if the stock closes above 110 per share.