Inflation Data Primary Reason for the Market Drop

Tom Gentile

Posted in
Newsletter

By: Tom Gentile
April 17th, 2024

6 mins read

Originally published via our newsletter previously. Subscribe for early access!

What do options traders do when days like this happen

Assess if there is a belief there is a further drop to come. If so, stand aside and manage current open option trade positions. Is it time to close the positions and take what profits are still there? Does one close the trades if they are in a losing position so as not to take any further loss on those trades?

These questions are dependent on one’s belief of market direction from here.

The CPI came out today and the data showed inflation is running hotter than expected, which may likely curtail any rate cuts from the Fed. This is different from what the markets have been told and were expecting just a couple of months ago.

The data was CPI came in at 0.4% vs expectations of 0.3% and up 3.4% year over year. I’m reading the fed funds future data has a 20.6% chance of the fed cutting rates in their June meeting.

Not only a month or so ago I remember it being in the realm of a 50% assessment a cut was coming.

Whether they do or not will be seen, but since the market doesn’t like uncertainty and the news received today is raising the uncertainty of a cut.

This may be a sell-the-news scenario and a bounce in equities prices may eventually come our way, but right now two things: 1) I am managing my positions and targeting prior price levels that may be support in the event things start to regain upside momentum or 2) I am looking to see if there are opportunities where stocks are coming off a resistance that could be viable option trades to the downside.


Market in Focus: SPY – SPDR S&P 500 ETF Trust

Image 15

When it comes to options trading, or rather when it comes to researching where to go to get education on how to become a successful options trader, you will here the saying (and I paraphrase) you can learn to make money in options trading whether the market goes up, down, or sideways.

I believe that to be true as I have done that, and I teach that.

When you see a pattern like in the SPY chart I don’t see a reason to be fearful of the markets dropping, but opportunity to consider a simple strategy like a ‘Long Put’ on securities I feel are poised to drop.

The pattern I see potentially playing out is an old support, like the 10-day SMA that was once a support for SPY, acting right now like a new resistance area.

Bullets (red) 1-4show where SPY traded at or just under the 10-day and shortly thereafter resume its uptrend above it. It now looks like that 10-day is acting like the indicator the SPY is using as new resistance. 

 If that holds as resistance we may have more downside coming our way.

Tools & Observations

We are going to discuss another viewpoint on how to assess Money Calendar data.

The question on a day like today when the market drops (or pops) for whatever reason.

The markets have had a pretty hefty drop due to the diminishing expectations of upcoming fed rate cuts;  This last sentence is only a speculative statement based on the CPI numbers coming in hotter than expected.

The concern is will the Fed cut at all this year and if so how many and when?

I showed you the technical picture in the Market in Focus page of this week’s newsletter. The economic news has been out since before the market open and now that the market is closed for today we saw the effects of all this on the investor’s psyche by the price action seen today.

When looking for the next options trading opportunity or more one of the valuable tools in my software, Money Calendar, is what we will look at now.

Typically, what’s looked at is the Mony Calendar patterns with start dates this week or even the day you are researching.

One other thing that can we find valuable is to see if patterns happening today may still be there a few days to a week out.

One can compare the number of days of the pattern and the average profit move that happened for both (multiple) scenarios.

The following are images of the Money Calendar data for DICK’S Sporting Goods, Inc. (NYSE: DKS) with a start date of today or next Wednesday.

MC Data DKS Start Date 2024-04-10
MC Data DKS Start Date 2024-04-10
MC Data DKS Start Date 2024-04-17
MC Data DKS Start Date 2024-04-17

The data for the Money Calendar pattern on DKS with a start date April 10 shows a 29-day pattern.

The data for the Money Calendar pattern on DKS with a start date a week later, April 17, shows a 23-day pattern.

Here is an interesting thing, though. The avg. profit on the pattern starting April 10, is $6.91 and the one with a start date April 17, is $6.61.

The potential upside price gain on the stock is only a difference of $0.30. If one waits a week the only difference is the stock will move $0.30 less than what’s expected on the pattern starting today.

What I see is one can wait a week and basically expect the same price move amount. It doesn’t matter what the price at the time of the option trade, as one can decide what strike price to trade based on what the price of DKS is at the time they decide to trade.

If one is not quite ready to pull the trigger on an options trade with a start date of, in this example, today, knowing there is another pattern on the same stock a bit later out AND one knows the expectation of the price move is pretty much the same, it may ease the anxiety of having to decide on actually trading today.

If there was no DKS pattern at a future date maybe one decides on going with a trade now.

The education uses the tools and analyze these types of situations, because it may help you decide when to act on an options trade.

Tom Gentile
C1P: Chief 1-Percenter


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