Get More Bearish After Apple: Wait for Technical Weakness and Buy Puts

04/24/2015 8:00 am EST

Focus: OPTIONS

Option trader Pete Stolcers, of OneOption.com, outlines how he plans to get more aggressive with put purchases once the market drops below the 100-day moving average and warns option traders not to jump the gun, but wait for technical support to fail and be ready to buy puts.

Posted 9:50 AM ET Thursday—Wednesday, the market pushed higher and it tested resistance at SPY $210. We are within striking distance of the all time high and the headwinds are stiff. Mega-cap tech stocks are starting to announce and once this wave of reporting runs its course, the bid should weaken.

Facebook posted Wednesday and the reaction has been muted. Microsoft and Google will post after the close Thursday and Apple will post after the close Monday.

Many industrials posted Thursday morning, and in general, stocks retreated after the news. Analysts often focus on the beat, but the real story lies in the year-over-year comparisons. Earnings estimates have been lowered so most companies should be able to exceed estimates. Unfortunately, the year-over-year increase is at the lowest level in years. Stocks are trading at a rich forward P/Es are at 18 and there is some fluff.

Flash PMIs in China were weaker than expected (49.2). This is the weakest reading in one year. Europe also missed expectations (53.5 versus 54.4). Central banks are printing money like mad and they can’t stimulate economic growth. The focus is on a stupid little quarter-point rate hike in the US and it should be on deteriorating global economic conditions.

Durable goods orders will be posted Friday. This is a volatile number and either way it won’t have a lasting impact. The bigger number will come next week when Q1 GDP is posted. Many analysts feel that growth will come in at a meager 1%.

Once Apple is out of the way, I can buy puts with a little more confidence. I am not in the practice of picking market tops and I need to see signs of weakness before I scale in.

I would like to see late day selling and a breakdown below SPY $209. The market is close to the 100-day moving average. Because we have been trapped in this trading range, it continues to creep closer to the current price level. It will be tested with greater frequency and I can get more aggressive with my put purchases once we are below the 100-day moving average.

Greece will need major funding over the next couple of months and it could add fuel to the decline. The rhetoric has been heated and they are not helping their own cause. On a longer-term basis, I believe credit risk is contained and Grexit could be bullish for European markets once the dust settles.

I’m not looking for a massive market decline, just a move to the lower end of the range. May is a seasonally weak period and given all of the influences, we should see some profit taking.

Don’t jump the gun. Wait for technical support to fail and be ready to buy puts.

If the market continues to rally, stay sidelined. The chances of a sustained rally are slim given the backdrop.

chart
Click to Enlarge

By Pete Stolcers of OneOption.com

Related Articles on OPTIONS