By: Tom Gentile
on January 10th, 2024
Originally published via our newsletter previously. Subscribe for early access!
Happy New Year! Here’s to a great year of options trading for 2024!
Time to get back to trading. Time to focus on and get in to the mindset of being a successful options trader.
Aside from improving upon the techniques learned it is also a time to expand upon your knowledge and learn new means to achieving / earning profits in options trading.
That is what I and my team will be focused on this year – helping you accomplish a better skill set of options trading through our education and with the use of our software.
Market in Focus: SPDR S&P 500 ETF Trust (SPY)
Have you heard of the January Effect?
Over the 30 years since the SPY came in to existence (1993) there have been 17 January months where SPY showed a gain. The other 13 showed a loss for SPY. That equates to a win rate for the month of 57% for a gain and a 43% loss rate. That basically means to me a breakeven chance of SPY going higher or lower. No significant advantage for the markets going higher because of the January Effect.
From 2009 to January 2023, a deemed strong time for the markets, the month of January for SPY was 7 times a gain/winner and 7 times a loss/loser.
The way I see it, an option trading strategy to consider for SPY may be a Straddle.
From the Desk of a CMT – Great Things Coming
I unplugged from many things over the last couple of weeks to put the chaos of a move behind me as much as possible. Turns out thirty years in one place makes that a little tough. Anyway, I finally got a chance to check out what Tom has been working on and am blown away by the additional tools we can access in the year ahead. If you’re an annual subscriber, please look for updates from HUBB and/or firstname.lastname@example.org.
2024 is upon us and it is the perfect opportunity for this to be a breakthrough year for you. What will it take? Here are a few key areas to maintain discipline so you can consistently improve and manage changing market conditions:
- Money management rules: don’t allocate too much capital to a single trade or correlated trades
- Risk management rules: know your exit rules before you enter a position
- Take profits: don’t miss base hits looking for a home run
The articles from 2023 had a more consistent money management and risk management rhythm, so 2024 will bring more attention to profit taking. It will also highlight tools to help you in all three areas, and quite a few of them are getting expanded or upgrades. You may want to add, “Keep learning” as item 4 for your list.
Emerging Bullish Momentum
Let’s start with Tom’s Option Tools to run a MACD scan to view asset classes that may be exhibiting bullish momentum (Stocks > Stock Rankers > MACD). The saved list of Asset Classes probably needs some updating, but for now includes the following:
TLT SPY DIA XAU GLD SLV USO IWM TIP DBC DBA EEM QQQ AGG LQD HYG SHY EMB IEF IEI IYR GSG REZ IWR IYT DVY COPX
Here’s the settings for the scan run after the close on 1/2/2024:
The scan produced five ETFs to review:
Changing it up today, figure 3 displays a daily bar chart from HUBB for GLD, the gold SPDR ETF. The MACD indicator is included along with highlights for bullish periods. Instead of a moving average, the Raff Regression Channel was constructed using a weekly chart with 10/14/2022 as the Start Date and 10/6/2023 for the End Date (vertical line to highlight end date). This reflects a weekly low to low which will then appear differently on the daily chart. With a longer-term trend underway, the weekly chart
The channel was extended to the right so we can assess price action at the middle linear regression line or ‘extreme’ (upper line, lower line), as dictated by previous price action.
Although GLD experienced weakness in the middle part of 2023, it’s had a sustained bullish move since early October with three different bullish MACD highlights.
The crosshair is slightly off with the screenshot tool, but the middle channel line is expected to be at 190.266 on 1/3/2024. Is this a prediction? No, definitely not. The channel lines can serve as areas of support or resistance, but “expect” is a statistical concept you can connect the idea, “on average,” for the price level.
Right now, MACD is displaying a bit of a divergence over these last three bullish momentum moves (MACD peaks have lower highs while price has higher highs), so let’s monitor MACD and volume over the next week to see how price behaves near this center line.
Given the period of time used to construct the Raff Regression Channel and the long-term uptrend displayed in figure 3, we have time. How will you prepare for a potential bullish entry?
- What tools might you add to the analysis without duplicating the unbounded momentum tool already in use?
- What option tools will you explore to map out a strategy?
- How does bullish GLD fit in your existing trade portfolio (do you already have $ allocated to a similar/correlated ETF)?
- What is your max allocation for this asset?
- What is your max risk for this asset class and how do you achieve that?
Without a concrete strategy in front of you it may be difficult to answer the last question, but you do want an answer to it before you enter a position.
Here are a couple of more things to think about:
- If momentum and volume suggest support will hold at the middle regression line, how many days will you require support to hold, a single daily close? Two closes?
- If you risk an early entry, how many daily closes below the regression line might you use for your exit?
A nearby exit for a loss can be a useful risk management tool, but it can also create whipsaws and/or make it difficult to reverse course once a sustained move in your expected trend is underway. How do you personally best manage that?
The timing for the articles has made me queue up ideas at times rather than offer up a case study, but since you need to trade to your plan, I do hope there’s good value for you to step through case studies thinking about money management and risk management.
To wrap this one up, how do you set an upside target when the ETF your assessing is making all time or recent highs? Hopefully, we have the opportunity to map that out next week.
Happy New Year!
Clare White, CMT
Happy New Year to you as well, Clare, and thank you!
— Tom Gentile
C1P: Chief 1-Percenter
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