Market Broke Out Of Resistance

So, the markets finally broke out of resistance (see chart), putting in two very solid days of performance.  The rally began when GDP numbers came out and illustrated to everyone that growth has been much more anemic than initially anticipated.  

Seriously lackluster results like 1.1% domestic growth would normally tank markets, but when you are dealing with a trigger-happy Fed, that number pretty much helped to seal the deal of no more rate hikes past this Wednesday’s May 3rd meeting. 

The Nasdaq 100 again was the top performer, closing out on its highs Friday and finishing +1.90% on the week.  This was fueled by decent earnings reports out of both tech and communications (see META and MSFT below), setting up Apple this coming week to also have high expectations.  

The question is now what?  Can the market really take off from here?  Based on what I’m seeing internally if you “lift up the hood”, my answer right now is no, at least not yet.  Sorry to be the buzzkill here, but we still are seeing 7 out of 10 sectors of the market remaining stuck in their ranges, without breaking out.  

When a few large cap names lead the indices higher, that can be a great start, but there is one major thing I will personally be looking for this week, and that is a broadening of what some large caps started last week.  

As I tell my options students, I’d rather me late with confirmation than to make assumptions. This deeper breadth needs to happen for us to have a healthy market, and not a lop-sided one looking good on the outside, but upon closer inspection, some rust underneath that new paint job (see below).

Looking above at both industrials (XLI) and the consumer sectors (XLY), which represent a large chunk of the S&P 500, we remain in a range which for now tells me to temper my optimism with more sideways options strategies, at least for now.  

With Apple one deck this week along with many others, plus a Fed meeting Wednesday and ECB Thursday, we surely have enough action this week to get things moving. 

When that happens, if that happens, I will be ready.

I will add to my basket as this information shows itself to me, and do it in a methodical way as I always do.  If the broadening happens, I plan on adding some consumer names, some of which are starting to look good (see below).

Many apparel names that have underperformed like GOOS above, and if this market takes off these are some names I’ll be watching closely, potentially using the “diagonal” or “vertical” strategies to minimize risk, and protect me from volatility and time decay.  

Preparation in any market is always key and I’ll be ready to add either bullish trades or bearish trades to my optimal “basket” of options depending on what the market decides to give me.

Sideways is the new up, mixed earnings keep things choppy, the VIX wakes up from a nap, and the Healthcare sector comes back out on top.

This week was extraordinarily lackluster, with the Dow Jones, S&P 500, and the Nasdaq -.22%, -.07%, and -.62% respectively.  We did see Oil fall from its perch over $80/barrel, down 5.76% at the close of markets on Friday.  The healthcare and utilities sectors were notably strong and trending higher, which

never gives much confidence to the bullish crowd!

Overall, we have seen an “orderly” pullback in the markets, and if you dig a little further you will notice that we had three negative days with green candles on the SPY (see below), which my analysis tells me that although I’m not super-bullish, I really should not be sounding the short-sell alarm anytime soon either. 

So, what does this mean for us traders?  For stock traders, sideways markets can be extra challenging because you are essentially sailing through the water with a missing sail (a.k.a. market direction/trend).  Y

ou have to be an excellent stock picker, and must think in terms of what group or name is working best today, and you have to be correct.  The overall market momentum is not helping you, because it is currently range bound. 

Given the economic data picture being mixed so far, with some data points hot and others cold, the possibility of a Fed increase in rates this May has risen to approximately 80%.  This could increase the likelihood of the old adage “sell in May and go away”, coming to full fruition this year.  

We saw a small spike in the VIX (see below), and my guess is we have “real money” guys and girls hedging into both this rate announcement and ahead of the summer trading months. 

It is in markets like these where I truly love being an options trader.  It allows me to take advantage of both short-term earnings plays, and at the same time, take full advantage of a sideways stock market.

For example, two weeks ago and before earnings created volatility in the name, I made a bold call on going long calls on AAPL.  For those of you who know me, I rarely utilize straight calls or puts, but usually come up with the best strategy given the situation.  

I saw AAPL pulling back but still in an uptrend, with volatility very low going into an earnings cycle where it was likely to increase (see below).  

I stayed in the position until Friday, and bailed out of the trade for a 50% gain on my premium. The most important takeaway:  I did this all BEFORE the earnings came out, with ZERO “coin flip” risk due to earnings release uncertainty.  Understanding the “push and pull” of volatility allows me to maximize my opportunities with less risk. Should I have remained in the trade?  Who knows? But with a gain of 50%, I would argue who cares?

At the same time, I was trading AAPL, I have sideways trades in the options markets on PYPL, which has been lackluster along with many names in the financial and payments space.  

With options you can use “butterfly” strategies (see below), where if the stock remains within the 70-75-80 range, I will see a paycheck on Friday. 

Having all these tools simultaneously at my disposal not just helps me sit through these choppy/range bound times, but allows me to profit handsomely as I await some true direction.  It is my goal to help as many people as I can to master these skills, I hope all of you will join me.

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