The market continues to show how resilient it can be. Whether the FOMC decision has a few questionable sentences or a large company like Apple has less-than-perfect earnings, the market overall continues to find a way to keep going higher.
As I watch the market here, it appears that the only thing that is getting in the way of higher highs for the broad market is the pace that it’s happening. When the market gets a bit too overbought, it tends to slow down for a few days. Sometimes there’s even a minor dip in the broad market to buy. But those dips ARE being bought, and the next new high seems inevitable each time.
That said, awareness of risk is crucial. At any time, we could see a fundamental input that causes a dip to become a pullback or a more major liquidation. So, it’s crucial to know the price points that could indicate it’s time to reduce or eliminate long positions.
But I can always define my risk and add leverage if I structure my trades using options. That’s why I take names I identify in my Outlier Watch List and perform my options analysis to find a trade that improves my risk/reward profile relative to a simple stock position.
For now, the first step for me is to identify a key sector that I am interested in. The natural answer could be technology, seen here with ETF QQQ:
While I like many technology names, and the overbought condition in this market has been reduced, I also like to look for contrarian views that may soon start getting bought if investors see value in their sector.
Of course, a particularly choppy sector has been basically any stock drive by oil, seen here with the ETF USO:
This solar ETF has just had a MACD crossover indicating that there may be a bottom in place. The risk for me is well-defined at recent lows, while the upside if there’s a shift in momentum could easily be back to the $55 range. With that kind of potential return and the leverage of options, I can certainly find a few new names to add to my Outlier Watch List.
As always, please go to http://optionhotline.com to review how I traditionally apply technical signals, volatility analysis, and probability analysis to my options trades. And if you have any questions, never hesitate to reach out.