Stocks started the week off strong, with Monday’s 1.2% gain in SPY allowing the ETF to retake the key $290 level after dropping below it during last week’s volatile trading action.
Last week’s sell-off took a lot of people by surprise… which was surprising to me.
Traders Finally React To The Yield Curve
We saw big drops on Monday and Wednesday as traders finally reacted to the yield curve. It was really just a matter of time if you ask me.
People buying stocks and bonds heavily at the same time isn’t anything new. It’s what’s called the barbell strategy… and it’s been used in the market for quite some time.
However, traders’ reaction to it was new.
Overreaction might be a better word.
The need to fill a 24-hour news cycle and the never-ending pursuit for eyeballs and clicks means the media needs to focus on something that can command people’s attention (even if it’s just for a quick minute).
And last week it was the inverted yield that sparked recession fears, causing traders to panic. But come on! People have been piling into bonds for some time now.
Luckily, these irrational downdrafts didn’t harm our trading here at Daily Profit Machine.
In fact, those who follow my Trade of the Day alerts had a chance to leverage Monday and Wednesday’s sell-offs into triple-digit percentage returns using options.
That’s one of the great things about options.
They allow you to leverage relatively small moves in the underlying stock or ETF into double- or triple-digit percentage returns. In the case of my Trade of the Day, these positions are often closed within a matter of minutes. At most, we’re talking a few hours.
Options also allow you to make money on both red and green days, essentially doubling your profit-making opportunities. This lets me start each day off with zero bias as I analyze overseas markets, potential market-moving news, and SPY chart patterns.
Looking at this week, I’ll be focused on a key range on SPY’s chart to guide my trading.
2 Key Levels For The Week Ahead
On the chart below, you can see there is support at SPY’s 100-day simple moving average (yellow line) at $290 and resistance at the 20-day SMA at $293 (green line).
While this $3 range probably doesn’t seem like much to stock traders, option traders know that this is plenty of room to make big profits. (For proof, just check out what some of my Daily Profit Machine members have to say on Twitter.)
As for the direction, we will trade each day (i.e., call options versus put options), that will be based on what I’m seeing in pre-market action on a given day.
Specifically, I’ll be watching:
- SPY support/resistance levels
- SPY chart patterns
- Overseas markets
- Potential market-moving news
To that last point, I have been advising caution in a market as news-driven as this one.
The biggest (scheduled) news to watch for this week is the release of the minutes from the Federal Reserve’s latest meeting, which are scheduled to come out at 2 p.m. ET on Wednesday.
Then, on Friday, we will hear from Fed Chair Jerome Powell, who is scheduled to give a speech at 10 a.m. ET from Jackson Hole, Wyo., where central bankers are meeting this week.
Any unexpected hawkishness from the Fed could cause markets to turn south again in a hurry, so I recommend you consider going all cash through these events.
I’ll update you if anything changes with the key levels I’m watching or if we have any unexpected news.