After finishing last week with an ugly flush to the downside, the SPX (shown below) bounced back with a vengeance, hitting a brand new all time high (ATH) to finish the week.
The bounce and the move to new highs were a big “change in tone” in comparison to how we finished last week, and this sets us up for a very interesting next few weeks.
While the indexes look strong, many of the stocks on our watch list are far too extended for new entries. Our leader as of late, technology, is the first place we’d like to get long, but we simply can’t take entries with NDX, GOOGL, FB, MSFT, and other tech stocks trading above +2 average true range (ATR) on the daily charts (shown below). This leaves us patiently waiting for a reversion to the mean, which is a pullback to the daily 21 exponential moving average (EMA), before we jump into long positions.
This also raises another question; if tech should pullback, will this “stick a fork” in the overall market’s push higher? Without a doubt, this is where the strength has been, and it’s this strength in tech that has kept the market grinding higher, even as sectors like XLI (industrial) and IYT (transportation, chart below) lose their bullish structure. If and when tech does come back down to earth, the market will need to see other sectors step-up and “take the baton” to avoid an overall loss of momentum.
With the markets currently extended at the highs, we will continue to hold our SPX call-credit spread as we have plenty of time until expiration; this position will serve us very well should we see the markets pull back a bit.
This week, we hit GOOGL with a quick put-credit spread (we entered in the 1 hour squeeze), and bought the position back for 75% of max profit this morning. With the markets extended, we’ll continue to look for these shorter-term swings off of lower time frames, but we will continue to wait for a pull back across the board before we start opening bigger positions for swing trades.
Stay Focused!