The market rallied hard making it the 9 out of 11 tradings days with positive gains. SPY has made since 4.2% during that time, but over the past month SPY has made a staggering 8.7%. And as expected, now we are seeing sentiment change.

But, I am not completely sold on the rally yet.

Why? Well, other than the overbought to very overbought readings in most of the ETFs I follow and all of the reasons mentioned in my post yesterday, we are also entering into the weakest period of the month of January. Just look at the DIA chart below for percentage of times positive over the next five trading days.

courtesy of Sentimentrader.com (click to enlarge)

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Numerous downgrades, more European woes, news of inevitable Greek default, financial sector struggles among other bearish news led to a lower, oops, higher open today? Yes, higher.

It has indeed been rather frustrating as a short-term bear since the gap open on 1/3. But, oftentimes when you are a contrarian and you make your livelihood on fading short to intermediate-term market extremes you often get into positions early. Any professional with any cred will tell you the same. It is to be expected. However, we are now nearing the area of max pain. While I thought we would see an immediate push lower after the first week of the year, I was willing to accept a push up to 1300 on the S&P or roughly $130.00 in SPY. We hit that level today and after the bulls pushed and pushed they failed miserably by the end of the day.

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The market, particularly the tech-heavy Nasdaq 100 (QQQ) continue to push higher this week. The rally that began on December 19^th has barely paused for a breather. But, if you look closely at the last four trading days it seems as though we are setting up for a move lower as the ETF seems to be struggling with strong overhead resistance.

Most of the highly- liquid ETFs I follow have pushed into a short-term overbought extreme, with several actually reaching a very overbought extreme.

Typically, when we see this type of price action, that is an upside gap (1/3) into overbought to very overbought territory at strong overhead resistance, a short-term reprieve is to be expected.

However, if you recall, I expected to see  a reprieve last week, but the gap in the tech-heavy Nasdaq 100 has yet to close.

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“What do you think about the latest economic report, data coming out of Europe, etc?”

That’s a question I often receive. My typical response, I don’t care. Okay, that may be a bit harsh, but it is true. For the most part I really don’t care about the daily news that flows in and out of the market. I am an options trader. I trade strategies based off probabilities. I create statistical advantages based on my current market assumptions.

We must realize that knowing what is going on in the news and knowing how to make money consistently are two separate things. For successful options investors it’s about your strategy, your logic, your process, it doesn’t matter what you think the market the latest economic report is going to say. I realize it’s a difficult concept for the options newbie to understand.

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A while back I had the pleasure to speak with a gentleman from a prominent newsletter service. It was interesting to see just how he traded options and how his newsletter service and others that he was affiliated with used options in their services.

As I suspected – he uses options irresponsibly in his service - as most people do. And I told him so.

His response – “You sound like an idealist.”

An idealist? Why? Because I do not allow marketing efforts to control my options strategies? Because I do not gamble with options by attempting to guess which way an earnings call will go? Because I do not buy out-of-the-money options in hopes that an option will move towards my chosen strike price?

I could go on and on.

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