Bullish Speculators Are Getting Flushed Out—Use SPY $200 As Your Guide

10/16/2015 8:00 am EST

Focus: OPTIONS

Options trader Pete Stolcers, of OneOption.com, outlines his latest option plays given the market's recent wave of selling, however, for any trader questioning his own next course of action, Pete suggests being patient and not shorting this market.

Posted 10:15 AM ET Thursday—Wednesday the market opened on the high and it closed on the low. This is the second consecutive day we've seen this pattern and it is bearish. The SPY is below the breakout at $200 and bullish speculators are about to get flushed out.

Asset Managers are passive. They don't believe they will miss a monster yearend rally and the bid is soft. The S&P 500 might have another 3% upside from here and it doesn't make sense to chase stocks at the high-end of the trading range.

This wave of selling will quickly run its course. I don't trust the early rally Thursday and we are likely to probe for support. I want to see an intra-day low and a reversal that leads to late day buying. That will be a sign that bullish speculators have been flushed out and that Asset Managers are ready to buy. The next rally should take us above SPY $202.

China will post retail sales/IP/GDP over the weekend and this will impact the market Monday. Conditions are better than feared and they are stabilizing. This release should be market friendly.

Walmart (WMT) rattled the market Wednesday, but I do not view this as a consumption issue. The retail market is oversaturated and there are stores on every corner. Visa (V) and MasterCard (MA) have been posting domestic revenue gains in the 4 to 5% range. This is the number to watch.

Amazon (AMZN) and Google (GOOGL) will post results next Thursday and I am expecting positive price action into mega-cap tech stock releases. We just have to let this wave of selling run its course.

I bought back my VXX short this week and made a 25% profit on the position since the jobs report (unleveraged). I also bought back my out-of-the-money put credit spreads for pennies. This locked in profits and released margin.

I'm still long some ITM calls, but this is a small portion of my allocation.

I am day trading from both sides of the market and I am waiting for that intra-day low and the reversal. If I see strength into the close and buying the next day I will get long and take some overnights. I feel we should be able to get above SPY $202 next week.

Be patient and let this wave of selling pass. Do not short this market.

Use SPY $200 as your guide. If we close above it, go long and use it as a stop.

chart
Click to Enlarge

By Pete Stolcers of OneOption.com

Related Articles on OPTIONS