Look For A Flat Market – Light News and Volume – Here’s the Plan

May 18, 2021

Posted 9:30 AM ET – The market has been able to recover from last week’s dip and it has floated back into the range from the last few weeks. This is a light news cycle and there is no catalyst to fuel a breakout in the next few weeks. Buyers and sellers are paired off and sector rotation has been brisk. I believe that the S&P 500 will trade between 4000 and 4200 for the next couple of months.

Earnings season was excellent, but valuations remain lofty. The S&P 500 is trading at a current P/E of 40 and a forward P/E of 23. Economic releases have been solid and there is no threat of Fed tightening.

Inflation concerns are elevated after last week’s CPI/PPI and the .7% increase in hourly wages in the Unemployment Report. Many analysts believe that the Fed’s 2.4% transitory inflation protection is too conservative. Time will tell and we won’t know that answer for a few months. This will keep a lid on the market rally especially if bond prices continue to drift lower (rising interest rates).

China is the “Canary in the coal mine” for global growth. They emerged from the virus eight months earlier than the rest of the world and they have been the global economic growth engine for more than a decade. China is in a bear market and stocks have fallen 20% from their high this year. Yesterday we learned that China‚Äôs retail sales were materially below estimates. I believe that these are signs that the global economic rebound will take longer than expected.

A few weeks ago the market got every shred of good news that it could possibly hope for and it was not able to breakout. This tells me that we need to spend time at this level. The upward sloping channel that started in November is going to transition into more of a horizontal trading range.

Swing traders should patiently wait for market dips to sell out of the money bullish put spreads. Focus on stocks with relative strength (basic materials and financials) and sell the spreads below technical support. This options trading strategy will generate income and provide breathing room. It also takes advantage of accelerated time premium decay. Do not chase stocks. There will be plenty of opportunities to get long.

Day traders should watch for tight ranges and light volume. This is a low probability trading environment and you need to trim your size and your trade count. Focus on stocks with relative strength/relative weakness and set passive targets. Option Stalker searches will help you find the best stocks. Once we get through this week, trading volumes will decline even more as the holiday approaches.

Support is at SPY $413.50 and resistance is at $417.50. I don’t believe that we will trade outside of that range today.
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