We have had three attempts at breaking out to the upside since the start of the year and each time we have bounced off the 1394 level in the SPX. Here we are knocking at the door again and this time I think we may have the legs to do it. As you can see by the chart below, the resistance has held and looks formidable but the conditions have changed and this could be the breakout.

There are a number of points which compel me to believe we may see a move through these levels this time. The first is although we are still mired in the sluggish economy and the financials are nowhere close to being finished with the credit problems, the market is always looking forward. That is the news of yesterday and the market cares about tomorrow. Right or wrong, that is how traders tend to think. Secondly, as we are starting to see this earning season, the expectations are so low we are getting some upside surprises. Next, our past attempts to break though these levels have been furious rallies followed by dramatic moves right back down. This time we are establishing a base and seeing higher lows. Finally, although the inflow into hedge funds this quarter was dismal, money managers are hording cash and if we break out they will not want not be left behind.

I am not assuming this is the end of our bear market or that this rally will be an extended one. My belief is we will have a nice short term bear market rally and will probably remain range bound for the better part of the year as we digest the election news, financial news and the commodity and currency recent moves.

My strategy from an option standpoint is selling vertical put spreads on the major market ETF's (SPY, IWM, QQQQ) with a target of around 2-3% below the current price, or roughly 30 to 40 delta options, and buying 2 strikes lower. In the case of the SPY I would be selling the May 132-134 Put Spread around $0.50. I am risking $1.50 but my probability of success is about 75%. I use May because my time horizon is relatively short and options decay quicker as we approach expiration. Additionally I am giving myself a cushion to be wrong and still remain profitable. In all the possible scenarios for this trade, 3 out of 4 will yield a profit for me. If we sit still, rally or drop modestly I will still be profitable. My only risk is if we sell off dramatically in which case my risk is defined. Good Luck and may you be profitable!

thinkorswim, Inc. and its registered employee, Steve Quirk, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.