Tom’s Weekly Newsletter February 8, 2023

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

There was an estimated 99% chance the Federal Reserve Open Market Committee was going to raise interest rates a 1/4 of a point today.

Come time of the announcement guess what happened?  They did exactly that.

That was just one facet of what the markets were concerned with.  The other was the commentary after the announcement.

One clear thing that came from his talk is the Fed is eyeing very closely the jobs data.  In other words, it seems we are labor dependent.

Some would say the commentary from Powell was a bit dovish.  Note there is expectations of another  quarter of a basis point hike to come in March.

We’ll see, but as long as there are no surprises to the expectations the market shouldn’t experience anything dramatic.

Corners of the Market

SPY – SPDR S&P 500 

The day of trade saw the equities market bounce back strong of its intraday lows of about 350 points or more down to reversing in a bullish fashion and closing higher on the day.

This, thanks to the Fed coming through with their expected quarter of a basis point rate hike and the following commentary from Fed Chair Powell not saying anything that would shake the market.

410 is an overhead resistance and the SPY closed above that on the day.  This is an initial one-day bullish sign SPY could trade higher.  One-day is good for aggressive traders, where those a bit more cautious will wait a day or two needing Spy to stay above 410.

If it doesn’t this becomes a false bar/candle breakout and higher prices will be in a stall.

TLT – iShares 20+ Year Treasury Bond ETF

A cup and handle pattern is a bottom support area in price with a run up to a previous resistance price.

The security pulls back again but not as much, making a higher bottom and a run back up to that resistance price as before.

This creates what’s called a neckline / a resistance point that when the security breaks out and closes above it the expectation is a price move higher.

One way to assess a potential price move is the neckline to the lowest support of the pattern differential and add that to the price point of the break out.

Remember equities and bonds tend to trade inverse to each other and if SPY trades higher that may mean a rollover in TLT and this resistance holds the price on TLT in check.

UUP – Invesco DB US Dollar Index Bullish Fund

Looking at a 100-120 trading day look-back one would ask where is the slide going to end or how much further could it drop.

On that number of day look-back one would think it could drop forever (not really, but it doesn’t look good for any kind of a bounce).

When the look-back gets expanded to the first trade day of last year there is a couple of possible price support areas one can look at.

I have those areas emphasized with a coupe of shorter, horizontal green lines.

Despite the B and R (Bullish and Reiterate Bullish) Darknet signals showing up on the chart, the act those levels have been breached to the down side has me still in the bear camp for the US Dollar.

USO – United States Oil Fund, LP

The bearish Falling Three Methods pattern played out with a bearish move (emphasized with the purple arrow in the chart).

The box range highlighted by the yellow box on the chart shows that even with the bearish move from the Japanese candle pattern USO is in a pretty sideways trend.

We are coming up on the seasonal bullish energy and oil pattern which takes place from mid-February to mid-July.

It wouldn’t hurt my feelings to see oil soften up a bit more until then.

This would give me what I feel is a better entry point, especially from a technical perspective.  Technically, if USO trades down to a clearer support price level, that may attract other technical traders and bump the price in oil over the time frame of the pattern and help any bullish option trades.

GLD – SPDR Gold Shares

From the Desk of a CMT – COST Pattern No-Go (for now)

Nope. Well maybe.

I’m afraid once again we have to abandon a potential pattern and put it in the “nope” category. We are simply too close to the apex of the triangle on the monthly chart for COST and the pattern is losing its shape.

Figure 1 displays the Jan 31, 2023, of the monthly chart with volume and simple moving averages (SMAs).

Given an apex projected for February, price movement just doesn’t fit the pattern requirements.

Figure 2 provides a weekly view with just the dashed pattern boundaries and in figure 3, the upward trending support line is redrawn, and volume included to see if COST is worth tracking for a projected move.

By redrawing the pattern lines there’s an extension of the apex out to July 2023 (rather than early March) so I’ll continue to track it.

It’s okay to redraw boundary lines as we track this overall sideways price action.

Not surprisingly, RSI is traveling between 40 and 60 indicating a stock in transition.

Let’s get a different view of COST by bringing up a daily chart from Tom’s Option Tools with Fibonacci’s to change our subjective bias.

 It looks like a basic downtrend more than anything, with earnings due in approximately 30 days.

It’s tempting to see if we can take advantage of continued sideways price action for COST and implement some type of credit spread strategy, but not when there’s a Fed meeting tomorrow and there are other options.

How do COST’s peers look? Is there some insight we can get from say TGT or WMT?  

WMT was impacted by this past week’s NYSE problems, but TGT is worth a look.

Price seems to be maintaining some bullish strength so let’s see if there’s a short-term, low risk strategy that can be implemented.

Figure 3 provides the price chart while figure 5 displays the IV charts for 7-30-day implied volatilities (IVs).

There may be a build in the at-the-money (ATM) IV’s heading into earnings; however, you could have time decay eat away at any benefit elevated IV would offer.

We’d need to be closer to TGT’s earnings date.

Let’s just go with a plain old basic call option with an expiration prior to the next estimated earnings date on February 28th.

This means an expiration of February 24, 2023. A smart search (Searchers > Multi-Strategies > Smart Search)

Let’s see if TGT can make another run up to 180 as it did last August and more recently in November. This case study will include a price exit for a gain, one for a loss, a timed exit, and a max risk requirement.

I scaled up the single call displayed in figure 7 to five contracts:

Entry: Buy to Open, 5 Feb 24 180 Call at $1.60/contract or $800

Exit:

• Sell for a gain: close case study with a move to $180 for Target
• Sell for loss: close case study with a close below $160
• By Monday, Feb 20th
• At max risk of $500 or if the call reached $0.60/contract 
• TGT may continue to move sideways so be sure to track that max $500 loss level, as well as the calendar (timed exit) to manage your risk.

Regards,
Clare White, CMT

Thank you, Clare.