Last updated on February 1st, 2021
The resiliency that this market continues to show is remarkable. We have seen all bad headlines and economic numbers brushed aside as many markets continue to make all time highs on a weekly basis. We are seeing attention shift to earnings season with all the big tech stocks on deck to release their quarterly earnings over the next few weeks. This is potentially a huge catalyst for two way price action to return in a big way.
Trading Around Earnings
Earnings reports can be tricky to handle as they can lead to large overnight gaps. Getting caught on the wrong side of a large overnight move can lead to painful losses. Market makers price in uncertainty going into these reports which causes the options to get very expensive. As a result, you need a lot of factors lining up in your favor to make money.
We prefer to take a more conservative approach around earnings. We don’t typically like to hold positions on individual stocks that have earnings coming out. In most cases we prefer to close any open positions before earnings are released and then look to initiate trades again 24-48 hours after the reports are released.
When we do decide to place trades going into earnings we like to use credit spreads as they will provide a higher probability of success while also tying up less capital. They also allow us to take advantage of the elevated option prices that are present around these reports.
Key SPY Levels For Next Week
The S&P 500 did establish a new all time high last week at 384.95. That is our new area of resistance that we are watching on the upside. Above that level has us looking at 385.50 and 386.00 as the next areas where we could see price stall out.
On the downside we continue to track the 8 EMA on the daily chart as the first area that needs to break if we are going to get any follow through on the downside. That level is currently sitting at 380.68. Below that level and we have an air pocket down to the 20 EMA and 20 SMA down at 376.00. We would love to see a break down to this level next week. In order for that to happen we will need to see the tech stocks get hit a bit.
Volume has been very light on this later run to the upside. SPY has struggled to hit 50 million shares traded on a daily basis. We would like to see this number closer to 100 million shares over the next few weeks. If this is going to happen we do need to see some selling kick in.
Stocks To Watch
In this week’s Options Recap Video below, we take a look at the key markets catching our eye going into next week. This includes names like NFLX, QQQ, SPY, XLE, and GME. We also cover a historic move on Gamestop (Symbol: GME) that we saw on Friday. The short covering rally that happened on Friday will go down as one of the wildest moves that I have seen in my 20 years of trading.
We also recap our Overnight Pop trades that we closed out on Friday morning. Take a look at the video below for a recap of our options trading from last week and also a preview of what we are looking for going into the next few trading days. If you have any questions that we can help with feel free to email me directly. Mike@netpicks.com