We're sending out this week's update a day early as I'll be on a flight all day tomorrow traveling to the Marcum Microcap Conference in N.Y. City. That said Tuesday might be a better day to enter new positions anyway–and we'll see why in a moment.
But for now traders are asking themselves how much more this market's got to run after the past two weeks rocket blast higher?
That's a relevant question as we rolled two positions forward to this coming Friday in an effort to stem losses from spreads being overrun.
Fortunately we're trading a strategy that gives second chances. But will a second chance be enough? To help find out let's take a look at…
The Markets and How They Affect Us
We're hitting the ceiling so it's either breakout or breakdown from here…
This past Friday traders held their breath waiting for Yellens speech. When she finally spoke this was the line they concentrated on, "It's appropriate, and I have said this in the past, I think for the Fed to gradually and cautiously increase our overnight interest rate over time and probably in the coming months, such a move would be appropriate."
While still being vague about the timing Yellen let everyone know a rate hike is coming. Sellers tried to take the market lower but the S&P stopped falling at 2,092 and after 30 minutes of no further downside the shorts began to cover. The market melted up into the close with the S&P ending the day at 2,099–right at overhead resistance.
Keep in mind the meltup came on super light volume at 5.5 billion shares—the second slowest day of the year. The Dow traded in a very narrow 49-point range–the narrowest for a full day of trading in the last 18 months.
That's not a ton of conviction–and although the market could still break through, any gains are likely to be much tougher from here.
One of the drivers of this recent rally has been oil prices. Crude touched the magic $50 level on Thursday, but as expected, there was some instant selling. That was the target price for many traders.
The upswing has been caused by a lot of production going offline–but that is destined to change soon. The oil sands in Canada are starting to come back online and Libya has worked out a deal with the various factions to start shipping oil again. The decline in oil rigs has slowed with active oil rigs only falling by -2 last week after being flat the prior week. With oil at $50 there may not be any further declines in rig counts.
Saudi Arabia does not want to see a rebound in the US oil sector. We have not had enough companies go out of business to prevent production from accelerating if prices remain over $50. This is why there will likely be no production freeze at the OPEC meeting this Thursday–and more than likely promises of production increases. That and a rising dollar could quickly put the whack on oil prices.
Plus it's doubtful the market can rise on earnings expectations as more than 98% of the S&P-500 have already reported. The blended earnings through Friday were down -6.7%. Eighty companies have issued negative guidance and 31 companies issued positive guidance. Revenue declined -1.5%. This the fourth consecutive quarter of earnings declines and Q2 is also projected to be negative.
Think about a rising market in this environment—This was the fifth consecutive quarter of revenue declines capping the worst string of earnings since the financial crisis.
In addition this week we've got the ISM Manufacturing report, the Fed Beige Book, ADP Employment and Nonfarm Payrolls as the most important items, but there are others as well. If everything doesn't come in perfect it would be hard to imagine what could drive this market higher after the last short has covered.
Which means we may still get a bit of upside on Tuesday, but after that it's a head-scratcher as to what can hold this market within spitting distance of all-time highs. The question is…
How Do We Make Money on It?
No matter what the fundamentals tell us the chart is pretty clear that this market is a lot closer to the top of it's range than the bottom. With first resistance at 2100 and then the 2,111 intraday high from April 20th–and then further up at 2,116 from November–all are strong resistance points and cumulatively only 16 points higher than where we are now. The downside however is pretty steep–and that tells us call spreads are the better choice in spite of having to roll recently…
Our first trade is a call spread on a stock that has been trending strongly high, but as you'll see that is likely to change this week–and if it does we've got a 25% potential return for just 11 days of time.
And for our Roth Retirement trade we're looking at a FAR out-of-the-money call spread for a conservative 11-day 23% profit.
We've got two good looking trades lined up to take advantage of this market–so let's get started…
Click here to gain access to today's picks.
Keep up the good work,
Peter