Market Summary
What has been happing recently is that when stocks pull back to near term support levels, investors take advantage of the opportunity by stepping in to buy which bids prices back up. Most of the major indexes are near their 20-day and 50-day SMA's which are considered the technical support levels. These support levels are expected to hold as prices are already starting to recover after five consecutive days of losses. Earning results may have a lot to say about how high the market will move. After companies start announcing financial results, it might not take much to move stocks higher. We can expect favorable earnings announcements to move the market up as it should not be a problem for companies to exceed diminished revenue and profit expectations. American consumers are spending more in stores and restaurants and the additional revenue should increase the likelihood of positive earning surprises.
Investor Analysis
Note in the chart above how recently, the last time the S&P 500 index pulled back to its current level, prices recovered soon after. Now might be a good opportunity to purchase some shares at a good price as the current pullback will alleviate overbought conditions, and it is reasonable to expect prices recover again as the first quarter earning season progresses.
Possible Strategy
Investors can take advantage of the opportunity to play a price recovery with a May option trade. For example, trading a SPY ETF May option expiration long $137 strike price call/short $140 strike call debit spread would cost $1.53 per share (based on yesterday's close – buy the $137@$3.09 and sell the $140@$1.56), but would generate $1.47 per share profit if the SPY gets back above $140 prior to May 18th (calculated as $140 minus $137 = $3.00 credit, less the $1.53 debit to buy the spread) For an explanation on the basics of option trading and description of how trade is set up go to http://www.theoptionplayer.com/option-basics/
By Gregory Clay
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