As the banking crisis wears down (for now), the market is back to accepting risk.  That can be seen from the Volatility Index (VIX) falling for another day.  The VIX typically operates inversely to the broader market, so when the VIX gets to a period of support or near-term lows, that’s when I take notice of potential reversals to occur.  In this case, that might be when the VIX reaches 18.  It closed yesterday at 19.12.

Of course, the VIX can remain low as the market melts higher, but again, it’s something to be aware of, especially since the number of new 52-week Lows is currently outnumbering the number of new 52-week highs, even as the market moves higher.

This isn’t a bullish or bearish signal, but the S&P 500 (SPX) nearly made an average true range move higher yesterday (+56.54) and yet the new yearly lows being made outnumber the new yearly highs. That’s not exactly showing a strong broad market run higher.

Granted, it looks better on the lower time-frames with the 1-month new highs outnumbering the 1-month new lows. Maybe we just need a little more time.

Now, we can put it all together and see where the S&P 500 (SPX) may be headed.

We’re in a trading range between 3800 and 4100 and yesterday’s close was above the 20-period exponential moving average as well as the 50-period simple moving average. Being above these two key moving averages is a positive momentum sign for the market.

The VIX bottoming and the number of stocks making new lows outnumbering those making new highs give me a reason to believe we might be a little overextended here, especially since we’re getting close to the top of the recent range.

The problem with being overextended here is that we’d be making a series of lower highs and lower lows and that wouldn’t help the overall trend that has been higher since October of last year. I wouldn’t be surprised to see a run up to 4100, and that’s when the fun begins.

What could get us there? Well, it’s the same story I’ve written about for a while. Higher weekly jobless claims would help keep inflation down. Friday’s Personal Income and Outlays (aka PCE) report could be the next catalyst.

If the Core PCE year-over-year breaks down from 4.7% (which is both the same as last month’s reading as well as the consensus for this month), the market would see that as a sign that inflation is lowering and the Fed may find it in their hearts to think about the possibility of maybe lowering rates later this year.

A surprise PCE report with the price index moving higher than 4.7% would dash those hopes and potentially send the market lower.

Today I’m looking at PBF Energy (PBF). Admittedly I don’t know that much about them, but I’m looking at a credit spread opportunity.

Here’s a weekly chart that shows the stock has been in an uptrend for several months.

It didn’t have as nice of a pullback as I’d like to see yesterday, but I do like placing bull put credit spreads on days when the stock is heading lower because that gives us an enhanced premium. 

I’m looking for potential support in the $41 range. Wouldn’t you know, that also happens to be around a 0.30 delta for the 21-APR options? That’s in the zone I like to use for selling options.

If we create a 5-wide bull put spread, that would involve selling the 21-APR 41 put and buying the 21-APR 36 put. As of the time of this writing, that would give us a credit of 0.90. I want at least $1.00 in credit for a $5-wide spread.

That means this trade isn’t quite ready, but I can certainly place an order for 1.00 and let the market come to me instead of chasing the market. With the market up so much yesterday, it would not be surprising for some profit-taking to take place and some stocks – maybe PBF – to retreat from current levels.

If PBF heads slightly lower from here, that put spread might creep up and give us 1.00 or more in premium and the order would be filled.

The risk profile of the trade looks like this (if filled at 1.00 or more):

As long as PBF stays higher than $41 by expiration, time decay will kick in and lower the cost of this trade. Since we’re placing the trade for a credit, we want theta decay (time decay) to wear down the cost of this trade so we can buy it back for less than the initial credit we received.

Now, I’m not a fan of stop losses on credit spreads because I have a direction and a theory on the trade. I want to make sure the trade has room to move and I don’t get stopped out because of an option price moving in the wrong direction.

That said, if PBF trades below $41 per share, my theory (and the long-term trend) is broken and I would bail on the trade.

My profit target is to keep 50-80% of the credit received.

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