Earnings Season Will Peak Next Week and That Should Keep Buyers Engaged

April 23, 2021

Posted 9:30 AM ET – Yesterday the S&P 500 was building on the rebound from Wednesday and it was within striking distance of the all-time high. News of President Biden’s tax plan sent a shockwave through the market and the S&P 500 shed 50 points in less than an hour. The market found support at the low of the week. Earnings season is ramping up and mega cap tech stocks will report next week and that should keep buyers engaged.

I am a trader by profession so naturally I do not favor the tax hike. However, this news had already been circulating for weeks. I believe that the market decline had more to do with profit-taking and extremely high bullish sentiment. Monday and Tuesday we were already seeing signs of selling. After an incredible stretch of 13 straight days with higher closes there were traders that were eager to buy the first dip. The relentless buying on Wednesday no doubt lured in more bullish speculators and it looked like we were going to make a new all-time high yesterday. The speed and depth of the market drop yesterday triggered sell stops and that momentum fed on itself as bullish speculators ran for the exits.

In my comments yesterday I said that swing traders should remain sidelined. I suspected that we might see a stronger round of selling once the tech giants report and I referenced that price pattern back in January. Swing traders do not need to chase this market. Wait patiently for a nice round of selling and reload your bullish put spreads.

I did suggest that day traders wait for support and that they favor the long side. I had a number of bullish positions on and when I saw the first long red candle I shorted the S&P 500 to hedge my positions. I recognized that this was a news driven move the moment I spotted it. Nothing else could move the market so quickly. That hedge protected my risk and gave me the time I needed to unwind my positions. Fortunately, most of the stocks that I held were strong relative to the market and I still finished the day with a profit. This event simply validates the advantages of trading stocks with relative strength/weakness. It also drives home the point that you should always have a five minute chart of the S&P 500 in plain view. Market first, market first, market first.

The overnight reaction to tech earnings was bearish. INTC was down after reporting and SNAP and STX were up. Fantastic earnings are expected and we will see if stocks still have some gas left in the tank.

Global economic conditions will be slow to recover as the Coronavirus spreads rapidly. Europe is improving slightly and countries plan to reopen in another month. India and Brazil have been hit particularly hard. The State Department has issued a “Do Not Travel” warning for 80% of the countries.

Swing traders need to remain sidelined until we get a nice market drop. Try to buy back your bullish put spreads for pennies and wait before you reload. Domestic economic growth will improve dramatically and interest rates have stabilized. A healthy quarter of profits will help to normalize valuations. It’s tempting to load up when we are on the brink of an economic recovery, but stocks are rich and that will spark profit-taking. The global spread of the virus and the proposed tax increases will provide a headwind. Your patience will be rewarded.

Day traders should go with the flow. After yesterday’s volatility stay flexible and use the 1OP indicator in Option Stalker as your guide. We are finding excellent opportunities on both sides of the market. With the exception of China, overseas markets were generally soft. If the market is making a new high for the day after two hours of trading, favor the long side. If the market is making a new low for the day after two hours of trading, favor the short side. Once the momentum is established it tends to continue throughout the day.

Support is at SPY $407 and $411. Resistance is at $414 and $417.
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