Tom’s Weekly Newsletter April 12 2023 

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

Earnings Season Will Be Here Before You Know It

Not to be too early with this observation, but with the market currently making more of a bullish run off the 380-382 price support, back in mid-March despite ALL the inflation, rate hike and regional banking concerns one thing that may cause a pause in upside momentum is earnings.

Either that or earnings help propel the equities market higher.

Earnings season typically begins about two weeks after the quarter ends and runs for about six weeks. The Quarter ended March 31 thus earnings season begins in mid-April.

Some significant financial companies report earnings April 14, like Citigroup (C), JP Morgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC).

Corners of the Market

SPY – SPDR S&P 500 

The SPY, which is the representative ETF used to assess directional bias on US Equities has formed a recent pivot high at 411.

This may just be a couple of days stall before buying kicks back in and propels SPY to its recent highs.

Should a rollover from here become more pronounced it may look more like a Head and Shoulders Top, (bearish).

If that happens it may take a bit of time before the neckline is reached, at which time it will need to be monitored for a potential breach of support – we will discuss potential target price moves lower if and when we get to that point.

There is a chance this stall ends a upside move to recent highs is possible.

TLT – iShares 20+ Year Treasury Bond ETF

100 is a price level that held as support.

104 is a price level that held as support.

This shows more of a correlated price move to equities, (which tends to happen less often than the two trading inverse to each other.

Equities are looking at risk of rolling over a bit where TLT looks strong over the last 6 trading days.

Should momentum continue higher TLT will be coming up on the overhead resistance and it is then we see if it has the gumption to break out or rollover.

Bonds aren’t directly affected by earnings, but since they affect equities, what happens during earnings season will indirectly affect bonds.  Investors may put more money to work in equities due to positive earnings reports and future outlooks being announced.

UUP – Invesco DB US Dollar Index Bullish Fund

Remember we do not analyze the Chart on UUP looking for an opportunity to trade options on this specific ETF.

The price moves are not robust enough and they don’t happen quick enough to be worthy of our attention from that standpoint.

We do watch and analyze it to help ascertain directional bias for equities as we tend to see an inverse trading correlation between SPY and UUP.

If one puts a Fib Retracement on the chart  from the early Feb. low 27.2 to the high of that up leg at 28.6, the current price is breaking even the 61.8% retracement level.

That is bearish as we see it, but we may now be at more of a support.

USO – United States Oil Fund, LP

The annotation message says it pretty clearly.

USO could be at a stall here at/near 70 which it reached post the OPEC+ news on production cuts of barrels of oil.

If it does not roll over here the first target we see for USO is just a couple points higher at that price resistance level of 72.

Upside and / or downside gaps have a habit of getting filled. It may not fill all the way or at all, but if it does that should not come as a surprise.

It’s possible profit taking has set in after the news that propelled USO higher, and if more comes in and drifts into a gap fill, it might take positive earnings and bullish forward-looking guidance to continue to move things along for USO.

GLD – SPDR Gold Shares

From the Desk of a CMT – Bearish Charts Persist in Financials

Two asides before jumping into a couple of case studies:

1. Regarding last week’s quest: why are some insurance companies getting hit so hard? It may be related to troubles in the commercial real estate market which has an estimated $400 billion in loans that need to be re-financed in 2023 (and a greater amount in 2024). Insurance companies can have significant real estate holdings, and this may be putting pressure on stocks in this industry, and they merit monitoring.
2. Using Fibonacci support and resistance levels, MSCI and FDS seem to have some bearish set-ups with low-risk entries (exit if price closes above resistance or two daily closes), but the open interest in further out months is too low at this time. If shorter-term windows suit your style, you may want to see if there’s an opportunity for you. I simply didn’t explore it. Big spreads can translate to big trading costs, so understand your total risk when open interest is low.

Two Bearish Case Studies: CB & STT

I’m going to run through both of these quickly because it’s the analytical flow I want to capture. The articles use Tuesday’s close, and a lot can change between now and when this article posts. Approach:

1. Review daily charts with Fibonacci levels for stocks in the financial sector (currently bearish)
2. Identify stocks that are approaching resistance (Fibonacci level), but may be losing strength
3. Assess implied volatility (IV) conditions for stocks that fit #2
4. Use the Smart Searcher to scan for bearish opportunities consistent with IV
5. Look further out in time to clear earnings season (or not)
6. Have a preference for odds that are greater than 1:1

Figures 1 – 3 include the following for CB:

• Stock chart
• Implied volatility chart (30-60 days)
• Smart Searcher results for a Bear Put Spread (debit) search

CB is just below the 61.80% retracement level (close at 195.46 versus 159.54) and may surpass it by the time this article posts, which would be a no-go.

The 30–60-day ATM IV is between its 20-day and 50-day SMA’s. This presents some risk for a debit strategy that is long premium. 

As a reminder, you access the Smart Search tool as follows: Searchers > Multi-Strategies > Smart Search. The results in Figure 3 used CB and a Bear Put Spread for the search.

The results are ranked by Days and both Open Interest and Odds were assessed. The section in Figure 3 followed options expiring in August.

Figure 4 provides the risk information for the bear put spread using 5 contracts. As always, risk is managed to the $500 level, but as an educational offering, I think it’s important to highlight the challenge that such a specific goal can be hard to obtain. Be sure to understand the risks and costs for the instruments you trade.

Going back to Figure 1, the 100% retracement level is 173.55.

That’s a pretty significant move in a short period of time.

It’s reasonable to expect an increase in IV with any strong price drops in CB so the case study may be battling this with a move down below the breakeven level of $188.55.

To provide a price target for an expected gain, we’ll use 80% of the move down to 173.55, which is $177.95.

With both legs in the money at this level, IV will have less impact. You may want to identify a partial profit-taking level for 2 or 3 of the spreads, below the $355/contract max profit.

You will be most successful when you use rules and guidelines that suit your style. Do review momentum and other technical tools to help build your guidelines.

Risk Management

• Stock Price: Exist for a loss with two daily closes above $195.54
• Position Loss: Exit for a loss with a spread move down $500 ($45 per spread exit) 
• Time: Exit by May 19^th

These case studies note technical conditions that may present opportunities. When lower risk entries are available, all the better.

A bigger risk for this case study is a price that remains below the $195.54 level that just moves sideways, causing time decay.

Figures 5 – 8 include the following for STT:

• Stock chart
• Implied volatility chart (30-60 days)
• Smart Searcher results for a Bear Put Spread (debit) search
• Risk graph for May bear put spread

STT is below the 38.2% retracement level (close at 74.62 versus 76.62) and may surpass it by the time this article posts, which would be a no-go. Figure 6: STT ATM IV Charts 30-60 day (4/4/2023)

The 30–60-day ATM IV is between its 20-day and 50-day SMA’s. This presents some risk for a debit strategy that is long premium. I proposed a May bear put spread. Given the IV charts, which case study suits you better given a similar IV environment for the 30–60-day ATM IV? Earnings for STT are expected in approximately 13 days.

The results in Figure 7 used STT and a Bear Put Spread for the search.

The results are ranked by Open Interest and Odds were assessed. Figures 8a & b appear on two pages and provide the risk information for the bear put spread using 4 contracts.

Going back to Figure 5, the 0% retracement level (starting point) is 59.84. 

Again, a pretty significant move in an even shorter period of time. Calculating an 80% move to this level, a move to 63.20 ($76.62 – $59.84 = $16.78, 76.62 – $16.78 = $63.20).

Given the abbreviated window and expected time decay if a persistent bearish move does not occur for STT, consider partial profit taking if the opportunity arises.

What are your guidelines for this? We will allow the timed exit to go to two weeks to expiration for this long premium strategy.

Risk Management

• Stock Price: Exist for a loss with two daily closes above $76.62
• Stock Price: Exist for an expected gain with price moving towards  
• Position Loss: Exit for a loss with a spread move down $500 ($50 per spread exit) 
• Position Gain: With a max profit of $325 per contract, what do your guidelines suggest?
• Time: Exit by May 5th

The position gain question is important. There are different scenarios that can unfold for STT, but that move down to the 0% Fibonacci line represents a 25% decline.

While certainly possible in a little more than four weeks, is there a better profit guideline for you to consider in advance? Remember, STT earnings occur in this window, so be sure to track the shorter-term ATM IV’s, too.

Finding your style is more than just looking back at trades – likely the profitable ones. What can you do in a case study environment to identify preferences and weaknesses as days countdown? 

Regards, Clare White, CMT

Great work, Clare – Thanks!