By: Tom Gentile
on January 11th, 2023
Originally published via our newsletter previously. Subscribe for early access!
Welcome back to trading and investing, everyone.
For those that know of me and my team and what we do, you know we are options traders. For those new to me and my team… we are options traders.
We use a Rules Based approach to trading options on stocks and ETF’s.
The process is…
- Spot an opportunity *via technical analysis and scans
- Build an acceptable risk options trade
- Trade and manage that trade to our profit goal or stop loss point
This is our process, and we will spend another year together educating you on how we go about this.
— Tom Gentile
C1P: Chief 1-Percenter
Corners of the Market
SPY – SPDR S&P 500
TLT – iShares 20+ Year Treasury Bond ETF
UUP – Invesco DB US Dollar Index Bullish Fund
There doesn’t seem to be enough bulls or bears to significantly pull the direction of UUP, my representation of the US Dollar either bullish or bearish.
Consolidation, just like in the SPY is the name of the game.
That’s fine and stands to reason since the two tend to trade inverse to each other, the fact equities aren’t trending up or down would speak to that being the case as well in the US Dollar.
The slide in the UUP from October saw an increase in price action for equities until December.
One would have expected a pop higher in UUP the month of December with equities softening, but the two went into a phase correlation where both are trading in a consolidated manner.
Which one goes bullish, and which one goes bearish is yet to play out.
USO – United States Oil Fund, LP
USO went up 2-points higher than the 68-price resistance.
From the Darknet B Bullish signal to the S (Stop/Stall) signal one could have realized a 3-point gain.
I have a horizontal price support drawn in let’s say, at 63.
USO hasn’t traded down to that price just yet. And it may not, but it is looking more likely possible.
For those that have been with me and my team for the past 7 years, know I educate and highlight a seasonal bullish pattern in oil and energy that happens more often than not between the months of mid-February to mid-July.
If this support holds it could make for a good launching point for those considering a bullish option trade on an oil or energy ETF or individual stock in that sector.
GLD – SPDR Gold Shares
From the Desk of a CMT – NVDA Wrap-Up & COST Symmetrical Triangle
Real quick everyone: This is Tom – Twice a month a good friend of mine and knowledgeable options trader and CMT (Chartered Market Technician), Clare White provides education on the markets and options trading as a way for me to enhance your education from more than one person’s point of view.
This lady knows her stuff, I trust her with you, my subscribers and I am happy she has agreed to be with me and you all for another year. Enjoy her knowledge and insights… Clare White!
Close NVDA Case Study
Rough earnings from Micron (MU) brought down chip stocks late last week and bullishness seasonality for NVDA at Christmas did not escape the bear. Figure 1 displays the closing trade on December 27, 2022, the timed exit for the case study. Unfortunately, this was also approached max risk for the position.
In this case, sizing the spread with max risk in mind worked out well.
Long-Term Case Study: Costco Symmetrical Triangle
A symmetrical triangle is a price pattern with the following characteristics:
- Bounded above by a downward trending resistance line
- Bounded below by an upward trending support line.
A minimum of five touches of support and resistance is required for asymmetrical triangle. This longer-term formation includes a price target out of the pattern and can experience false breakouts and pattern throwbacks.
- Measured Move: 1st Resistance point – 1st Support point at pattern opening
- Breakout Direction Expected: May continue or reverse price
Volume is a critical component of pattern definition. For a symmetrical triangle, expect volume to decrease as you continue into the pattern then accelerate with a pattern break. Tracking volume behavior at the boundaries can provide clues about the direction of the eventual break.
Consolidation patterns, which include symmetrical triangles, can experience false breakouts or pattern throwbacks making it a challenge to determine if price will continue or reverse once it begins trending again. One solution to improve trading performance for such patterns is the addition of a price and/or time filter.
- Price Filter: Requires a breakout carry price some minimum distance away (for instance, 2-3% of breakout price).
- Time Filter: Requires the closing price to remain outside of the pattern or support/resistance line for a consecutive number of periods, (for instance, 2 weekly closes).
Momentum tools may also be used to gain insight on the potential break.
Here’s a daily chart view from December 13th that captures the price formation. I switch over to TradingView for weekly and monthly line charts with measured move calculations.
The potential pattern was initiated with an April price peak which served as the first touch of the pattern boundaries.
By October, a fourth touch of the boundary makes the possibility of this formation worth monitoring.
Throughout the remainder of this article, I’ll drop the “potential” from pattern, but do recognize this can ultimately be a failed pattern. There are no guarantees in the markets.
The weekly chart in Figure 3 has dashed boundaries drawn in November with conservative, approximate measurements for possible breakout points (up and down). The downside was since refined with an actual value given the break on December 16th. Volume, rate of change (ROC), and the relative strength index (RSI) also appear on the chart.
- Measured Move: $600 – 416 = $184 (projected move from the pattern)
- Recent Break: $467
- Projection: $467 – $ 184 = $283
Given my style, it’s worth it to wait and see what happens the first week of the year to see if we get a test of the pattern since January typically starts out bullishly (remember how that worked for NVDA). It’s a pretty big move, so there’s no urgency to jump in. We’ll explore potential case studies next week.
Volume has increased with this recent decline and momentum is weakening. Success for this break is not a foregone conclusion so we’ll see if RSI can find support at 20. Note in the last move upward (fifth touch of boundary) there was a slight pattern break but RSI failed to reach the 60 level and price retraced into the triangle.
I wanted to also provide a monthly view which has slightly different measured and projected values.
- Measured Move: $575 – 450 = $125 (projected move from the pattern)
- Recent Break: $477
- Projection: $477 – $ 125 = $352
Although a different approach than used in the past, we may want to focus on the monthly target first since it will be reached sooner. If things continue to progress bearishly, we can look at the lower target.
Figure 4 provides this view with a more pronounced break of the pattern to end October, with divergent momentum. In addition, volume was not strengthening with the break of pattern’s resistance line. This break seems to be a more favorable one; however, a move back to test the pattern in January would be ideal.
Figure 4 provides the monthly line chart with volume and momentum.
You may want to look at other names in the staples sector to see if similar opportunities are emerging. I think this pattern looks pretty good but there may be better ones available. We want to consider option liquidity as well.
Happy New Year! Here’s to a prosperous one for you, your family, and friends.
Regards, Clare White, CMT
Thank you, Clare!
— Tom Gentile
C1P: Chief 1-Percenter
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