Tom’s Weekly Newsletter August 24th, 2022

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

Fed Minutes and Retail Sales Data Released Today

Usually the release of the Fed minutes isn’t a market mover.  For the most part everything that is in the minutes was talked about prior when the Fed chair made the announcement on their decision on interest rates.

The minutes from the meeting of the Federal Reserve showed they would continue its aggressive hiking campaign until they calm or tame inflation.

Maybe we are seeing a balance of good news and not so greates news from the retail sector.

Expectations were for a gain of 0.1%, instead retail sales for July came in flat.

Excluding autos, sales increased 0.4% against expectations for no gain.  Online sales were up according to the Census Bureau.

A candle day that is slightly green (bullish) or slightly red (bearish) really can be looked at as a Doji day, as the Japanes refer to the day’s candle.  A Doji day means a day of indecision, wehre there wasn;t a clear winner between the bulls or bears on the day to give indication of market direction.

Balanced Approach to Investing / Trading

If one wonders if they can stay neutral on the markets, meaning both bullish and bearish, an approach would be to see what sctors are performing in a bullish or bearish fashion and find optiont trades according to the sentiment of that sector.

Energy, (XLE) at the time of this writing was the one bullish sector ETF today. A bearish sector is Semiconductors, which is part of a bigger sector ETF, the XLK.

Four Corners of the Market

The uptrend off the June lows appears to still be intact.

The previous resistance at 419 needs to hold as support for expectations of a higher SPY tom come remains.

The green arrow on the far left in the chart image above is a potential target price, (maybe even a bit lower at around 439.

Should SPY break down and trade below the 419-price support level there are two more pivot point areas lower that SPY could retrace to.

The price point levels lower are also shown by the two lower green arrows.

It may seem weird to assess support price points lower when the markets are running higher, but we take the approach we assess possibilities ahead of time that way we are not surprised, and we are prepared to take action as needed if what we see as possible actually plays out.

Don’t be surprised if TLT retraces back to its previous lows.

This isn’t a market call where we are saying that IS where TLT will go. It is just a heads up to everyone that is a possibility.

Horizontal resistance as we see it is 120.

There is an ascending support line starting with the June low to the day before yesterday.

Today’s price action saw a slight gap down and almost the entire rest of the day traded lower, closing maybe $0.30 off their low.

Not only is the day a bearish day, but it also broke and closed below what we see is the ascending support since June.

This is why we see a prospective move lower as possible.

One-minute UUP is breaking support.

The next minute, UUP is trading up through a descending resistance line.

UUP was in a down trend since early July, after being in a stronger up trend for the year.

Right now, it broke up above the descending resistance line, which may bring higher prices in UUP.

We don’t trade UUP, nor do we consider options on UUP.

We use it as a barometer for what may happen with equities as UUP tends to trade inverse to US Equities.

If money is flowing in to UUP components it tends to indicate money flowing out of US equities. That hasn’t happened just yet, but something to keep an eye on as some feel equities are overbought.

Double bottom support may be now a triple bottom support.

All the while horizontal support is continuing to form, the prices of USO is getting lower, creating a descending triangle pattern.

If it breaks support one can take the widest width prices and anticipate a further drop that amount from the price point of the breakdown IF it happens.

Should support hold and USO find some buying come in the descending resistance line is the first hurdle USO would have to clear.

Per the SPDR Sector ETF’s, the XLE, which is the Energy ETF was the only bullish sector ETF on the day. It was the only one showing a gain.

One can either go find stocks in that ETF that outperformed, or one can consider trading the XLE itself. We would consider and have traded options on XLE in the past.

Editor’s note – last week the annotation said could it be old support becoming new support when it should be new resistance.

GLD has been in a downtrend since its peak late Feb/early March.

The number of days in the chart image above is a 400-day time period.

We had to look back that far to see if and where we could find a support price level.

Consider that price level 157.50.  GLD tested that price recently and traded higher from that. That is bullish price action.

What could be the fly in the ointment for GLD is the Darknet S signal.

The S signal doesn’t mean to sell the stock or ETF short. It just means the up leg or run up in price it is experiencing may Stop or Stall for the time being.

Case Study from the Money Calendar Scanner

One of the worst performing Sector SPDR ETF’s on the day is the Communication Services Select Sector SPDR Fund (XLC).

What we can do is then look for a stock that is a component of the XLC and see if it has a Money Calendar Pattern with a 90% or 100% history of trading lower.

Lower, because the sector ETF is trading lower, so we want to look for a stock trading or that has a pattern that shows a strong history of trading lower over a period of days 9 or 10 of the past 10 years.

A stock that fits that bill and has the qualifying Money Calendar parameters on it is T-Mobile US, Inc. (TMUS).

When we say it has the qualifying Money Calendar Parameters we usually mean it has a 20-30 pattern. TMUS does not. It has a 6-day pattern.

It is alright, though because we can incorporate a Call Credit Spread strategy on this stock with that amount of days to expiry.

Call Credit Spread

This is a strategy where one Sells to Open a Call option on a security at one price and on the same order ticket one can Buy to Open a Call option on the same stock, but at a higher strike price creating a credit to the account.

One can’t exactly count on that money as theirs just yet. The way it is fully realized is if the trade is closed or expiration happens without the options going through assignment and exercise.

The goal of a Credit Spread like this is to have the options expire and then the credit is definitely kept.

We like to place the credit spread at a point where we don’t think the stock will go to or be at come expiration.

Below is the credit spread one can consider:

This is a 1-point spread. The most one can make is shown as the Mac Profit in the image above.

If the stock is below 149 at expiration the markets can assign your account to deliver TMSU at 149. You want your account to then exercise the stock at 150 (to replace at 149). That is a 1-point loss, but you offset that by the credit taken in or 0.23 per contract and that leaves your max loss at 0.77 per contract.

Make sure you know how Assignment and Exercise works at your brokers site as it should be able to be done automatically.

The ideal situation one wants is for the stock to be under the sold strike in the spread, which is 149.

Should the stock be under that sold strike at expiration it is unlikely the markets will assign the stock at 149. The option will expire.

This will likely result in the 150-call expiring.

When both options expire the account will be able to realize the 0.23.

This is a 29.87% ROI potential (0.23/0.77 risk).

We try and set up our ROI potential on credit spreads to get an average return on investment of 1% a day. This is a 9-calendar day trade or a 2.55% per day ROI.

How do we know TMUS will be under the sold strike in the spread? We don’t.

What we do have is the Money Calendar pattern showing 9 of the past 10 years it traded lower. If it goes down just its average amount shown in the Money Calendar data it could lower and be under the sold strike at expiration.