Tom’s Weekly Newsletter July 19, 2023

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

Bullish Options Traders Rejoice as the S&P 500 Reached a 2023 High

Thank you, CPI!  The Consumer Price Index (CPI), which is a measure of inflation. It compares the change in price over time for a basket of consumer goods and services.

The CPI report came in showing an increase at 3% on a year-over-year basis (June). Expectations were for it to come at a 3.1% increase. Also, the core CPI,  which strips out volatile food and energy prices, rose less than expected.

This led to the markets gapping higher and ending up closing higher on the day. The S&P 500 reached a new high for 2023.

Both the S&P 500 and the NASDAQ are trading near prices achieved in April 2022.

This may be a short-lived celebration as the Producer Price Index (PPI) comes out tomorrow pre market.

The CPI numbers gives an indication inflation is or may be cooling off a bit. This may mean the Fed will be able to navigate things in its fight against inflation without causing a recession.

The CME Fed Watch Tool is pricing in an approximate 92% chance the Fed raises interest rates a quarter of a point at their July meeting.

Note the chance for another Fed rate hike in September has dropped to 13.3%, down from 22.3% on Tuesday and 18.1% a week ago as reported by CNBC.com.

As for now, I am still leaning towards a more bullish expectation for the markets, but with prices this high a pullback in the price of security’s – whether it be profit-taking or not is plausible.

Market in Focus

Equities: SPY

Let’s take a look at the markets from a technical analysis perspective as options traders look at technical more so than investors, but both camps can benefit from a look at the charts.

I have the OHLC, (Open, High, Low, Close) bars shown as they are clearer than candles charts on this far look back in time.

Love it when a reliable technical pattern plays out. Old Resistance at 430, became new support at 430 and the SPY is climbing.

There is no certain way to say it WILL continue, but until it breaks that 430 mark to the downside I lean more to the bulls side than the bears.

Tools and Observations for Options Traders

Prior to the Independence Day holiday I wrote about a way one can use past history and my scanning tools to get an expected price move (and percentage move) in the SPY 10-days after the holiday.

This was to gauge if there is a bullish or bearish tendency for the markets 10-trading days after. Turns out the Money Holiday scan found some data for us to use.

This table was created by and taken from my tools, (www.tomsoptiontools.com).

The tools found data showing the SPY has an 80% accuracy or history of trading higher after Independence Day.

It also showed that it moves an average of 1.70% higher, which equates to an average price move higher of $3.64-points.

10-trading days out past the holiday would put the end date for this anticipated run at July 18, 2023.

Today’s closing price for the SPY is $446.02.

The open price for the SPY on July 05, the day after the holiday was $441.91.

Adding just that average gain amount of $3.46 to that open price one can at least anticipate a move to $445.37.

The SPY’s close shows it hit that target. Today and exceeded a little bit.

Again, we are talking trading days.

Since we hit an anticipated target based on the education previously provided I was curious ok, what now?

As an option trader sometimes, I will hit a 100% ROI on an options trade, close half and let the rest run in anticipation of more upside or maybe even another double on that last half of the amount of contracts.

I added 5 more trading days so that we can see what the SPY did 15-trading days after the holiday. This has the end date of the analyzed time as July 25.

One day before the Toms Newsletter is produced that week, (Wednesday the 26th).

The average percentage run is 2.42% or an avg. price move of $6.69.

If one were to add $6.69 to the opening price on July 5 ($441.91), that gives an anticipated price target of $448.60.

We can’t predict or guarantee this will happen any more than we could have said for certainty the 10-trading day scenario would.

As options traders we research and analyze patterns and build an acceptable option trade around those expectations and manage the trade win, lose, or draw to the best of our ability.

I said I was leaning bullish on the markets and now with one price target hit, let’s see if there is enough strength in the SPY, (the markets) to reach this next one.