Weekly Options Recap 12/12/20

Last updated on January 12th, 2021

As we wrap up another week of trading, we are seeing a continued focus on the Covid-19 vaccines as well as another potential stimulus plan. Coming into this week, we had overbought conditions across the board. The market tried selling off a few times but was unable to get any follow through on the downside. We continue to see most dips bought after only a few hours.

SPY started the week making a new all time high at 371.05. We have been talking for the last few weeks about how important the big round numbers are. It’s no surprise that 371.00 held as resistance on Monday.

While we didn’t see a big pullback the rest of the week, we did see a move off the highs. Price finally broke the 8 EMA on the SPY daily chart to end the week on Friday. Anytime the 8 EMA has been tested the last few months, we have seen a quick bounce back higher. We will have to see if that plays out once again next week.

We will continue to track 371.00 as an important area of resistance above us going into next week. Should that level break, we will be watching 371.50, 372.00 and 372.50 as the next areas of potential resistance. On the downside the 20 SMA as well as the 20 EMA are sitting around 363.50. This level was tested on Friday and held as support on the initial test. We will need to see that level broken on the downside next week to get more follow through lower.

In recent recaps, we have been talking about the market showing signs of being tired. We referenced the volume contraction, mixed internals, and tighter intraday range as signs of markets tiring out. We saw all of these factors come into play again last week. The volume struggled to hit 50 million shares on SPY and the internals were mixed at best most of the week. The ATR (Average True Range) continues to contract down towards the 4.00 level. We would love to see bigger volume, better range, and more active internals going into next week. In order for this to play out we will need some selling.

Going into next week, the catalysts are there for better two way price action. Late Friday, the first vaccine was approved here in the U.S. Since the market has been rallying for weeks now on rumors of this approval, it will be interesting to see if this turns into a sell the news event. We also have the Fed statement on interest rates out Wednesday afternoon. Finally, we will continue to have the stimulus rumors to navigate as well. We are expecting an active week of trading before we get into the holiday stretch during the second half of the month. If we are going to see some selling, next week is the perfect window.

With the market so overbought at these levels, it is more difficult to initiate new long trades. We would rather see a pullback first which is what we are expecting over the next week. Some of the names that are on our watch list going into next week for new trades include IWM, SPY, XLF, BAC, TSLA, FEZ, MSFT, and AAPL.

We review some of these trades that are setting up for next week in the recap video below. Take a look and let me know if you have any questions that I can help with. We will be back on Wednesday for our next midweek update. Mike@netpicks.com.

 

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