Market Hitting Resistance—Too Early to Aggressively Buy Puts

04/15/2015 8:00 am EST

Focus: OPTIONS

Given last week’s rally on light volume that’s challenging the upper end of the range on Tuesday, option trader Pete Stolcers, of OneOption.com, suggests planning for resistance and explains why he sold out-of-the-money put credit spreads last week and now thinks it could be a boring options expiration.

Posted 10:10 AM ET Tuesday—Last week, the market rallied on light volume from the low end of the range. Now that is challenging the upper end of the range we can expect resistance. Stocks sold off Monday and they are weak Tuesday morning.

The news is light and this could be a boring options expiration.

China posted weak economic results Monday and industrial production/retail sales will probably come in light Wednesday. The market won’t care because analysts are expecting the PBC to ease.

JP Morgan and Wells Fargo announced Tuesday morning. One stock traded higher and the other traded lower. They did not have much of a market impact. After Tuesday’s close, Intel will post results. They warned a few weeks ago and bad news is priced in.

I sold out-of-the-money put credit spreads last week and those positions are in nice shape. I’ve pretty much maxed out my profit so I will be buying them back Tuesday and Wednesday.

We should still get one nice push higher. Ideally, we will run back above SPY $210 and poke through the all-time high. If that happens, I will buy puts when we close below SPY $212 and I will add below $210. If the market does not make a new high, I’m still prepared to buy puts if we rally above $210 and then close below it.

I am not overly bearish right now and I’m not anxious to take bearish positions. First, I want to see an attempt to take out the high and I want the rally to fail quickly. That would be a sign of exhaustion. If we poke through $210 and fall back in the next few days, I’m not overly interested.

Some of the mega-cap tech stocks need to announce (AAPL, FB, GOOG) before I get aggressive with my shorts. Once the transports/industrials/energy start reporting, the news will weigh on the market. In short, I believe we are a couple of weeks away from profit taking.

Many analysts claim that bad news is priced in. I don’t know how they can say that when stocks are trading any rich forward P/E of 18.

The strong dollar, minimum wage hikes, low oil prices and bad weather will impact profits. The market will try to discount these events and it should be able to in the early stages of Q1 earnings season.

Greece is in constant need of money and they are living hand-to-mouth. They are not helping their own cause and the rhetoric remains harsh. I would not be surprised if the EU boots them out this summer. That would be bearish short-term and bullish long-term. If it happens in the next month, the timing will coincide with dismal Q1 earnings and we could decline to the 200-day moving average.

The market is trapped in a six-month trading range and I don’t see any catalysts. We are at the top of the range and that should set us up for a nice shorting opportunity.

Trade individual stocks. The market is not going anywhere, but there is nice sector rotation.

Prepare for a choppy week.

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By Pete Stolcers of OneOption.com

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