Stocks Are Primed to Move Higher

Market Summary

Take a look at the SPY daily chart below and you can see how the exchange traded fund is pulling back from the recent highs. U.S. stocks finished the month with the best January results in over a decade. The SPY is an exchange traded fund (ETF) that represents the S&P 500 stock index. The S&P 500 gained 4.4% or 54.81 point in the month, its largest January point increase on record. Stocks may be taking a breather and consolidating gains generated over the past month or so. This is generally considered a bullish sign as stock prices usually continue in the direction of the trend after consolidating.

Investor Analysis

As mentioned above, stocks are in a strong bullish trend and may be taking a pause before moving higher. The major stock indexes had huge gains in January and traders appear primed to move prices higher.

Possible Strategy

As the bullish move continues, some investors are considering debit spread strategies to profit from the S&P 500's possible move higher. For example, trading a SPY February option expiration long 131, short 134 debit spread would cost $1.30 (based on yesterday's close – buy the 131 @2.00 and sell the 134 for .70), but would generate $1.70 profit if the SPY rose above 134 prior to February 17^th (calculated as 134 minus 131 = $3.00 credit, less the $1.30 debit to buy the spread)

For an explanation on the basics of option trading go to http://www.theoptionplayer.com/option-basics/

By Gregory Clay