Tom’s Weekly Newsletter July 5th 2023

Tom Gentile

Posted in

By: Tom Gentile
July 5th, 2023

5 mins read

A Favorite Technical Chart Pattern for Trading Options Successfully

Figure 1: 100-day Candle Chart on NVDA
Figure 1: 100-day Candle Chart on NVDA

We have mentioned this pattern in many newsletters and educational write-ups on how to be successful trading options.

It is a technical pattern where a price level that acted like a resistance price the security had trouble clearing and moving higher from finally see the security break above that price or price level.

After it does that, sometimes the security keeps ramping higher.  Other times it needs to come back and test that old resistance price level where it then sees people who may have missed the break out now get a chance to get in on the security at that price.  When that happens, it becomes the new support level the security bounces and or runs higher from.

Tom Gentile
C1P: Chief 1-Percenter

Market in Focus

Equities: XLK

Figure 2: 100-Day Candlestick Chart XLK
Figure 2: 100-Day Candlestick Chart XLK

The XLK is an ETF that tracks stocks in the tech sector or technology stocks.

One can find the holdings for this ETF at the website

The annotation in Figure 2 asks what technical pattern you see.  If you answered possible old resistance becoming new support, then congratulate yourself for having trained your eye to see such a pattern.

The top of the price chart candlesticks may different in that the top on NVDA is more of a rounded top and the top of the XLK chart is more of a pure pivot, but that matters not when you are ascertaining the situation where price is testing a prior resistance level and showing sings of bouncing off that making the new price level a potential support.

An initial price target at this point could be the previous high in which the security rolled over from.

From the Desk of a CMT: MACD Ranker, DE Review

Although we have a few more days to go for end of quarter window dressing to wrap-up, summertime can bring market declines into August and September, so this article will make use of a bearish scan. If you track economic data, segments of the industrials market are suggesting declining conditions, so the scan will be on XLI components, the Select Sector SPDR ETF for industrials.

As a quick review, the scan is accessed from the following menu selections:

 Stocks > Stock Rankers > MACD

Figures 1 and 2 provide the scan details and results. Note the settings for a bearish crossover are faster than traditional MACD settings since declines occur more quickly.

Figure 1: MACD Bearish Scan on XLI Components (6/27/2023)
Figure 1: MACD Bearish Scan on XLI Components (6/27/2023)
Figure 2: MACD Bearish Scan Results for XLI Components (6/27/2023)
Figure 2: MACD Bearish Scan Results for XLI Components (6/27/2023)

Hmmm … which one should we pick? You may want to first run the scan on all of the sector SPDRs, then run through the charts for those results to determine which sector SPDR you want to run your scan for component stocks.

I do like how the chart option in the scan results links you to a chart with the settings in place already.

In this case, the simple moving averages (SMAs)with the price chart also reflect our faster settings of 19-days and 6-days.

Note it’s estimated there are 52 days to the next earnings for DE, which will allow us to look a little further out in time.

Figure 3: DE Daily Chart with 6-dy & 19-dy SMAs and MACD (6/27/2023)
Figure 3: DE Daily Chart with 6-dy & 19-dy SMAs and MACD (6/27/2023)

Option implied volatilities (IV) percentiles are relatively low right now across all time frames. Earnings IV crushes appear in the shorter-term (7 – 30 day) and the 30 – 60-day IV’s should capture the earnings window. Both are shown in figure 4.

Figure 4: Earnings IV (7-30 day and 30-60 day)
Figure 4: Earnings IV (7-30 day and 30-60 day)

Changing things up a little here, I accessed DE option chains to find a Sep 2023 out of the money put with a cost that could be offset by a nearer term put (calendar spread).

Weeklies don’t offer too much in the way of a premium offset, so the Jul 21 options were viewed. This strategy will look for opportunities to roll the short side of the calendar to continue to decrease overall costs. We’ll track price and volatility into earnings for DE, using recent highs and lows for risk management and exiting for a gain.

Figures 5 & 6 display the case study set-up, which will look different when this article posts. The purpose of this article is to highlight a method for exploring opportunities, along with risk considerations.

The opportunities you uncover need to fit your style and preferences. I tend towards plain vanilla single option strategies but am playing around in this week’s case study. Regardless, risk management will be a part of the discussion.

Figure 5: DE Calendar Spread Case Study as of Tuesday’s Close (6/27/2023)
Figure 5: DE Calendar Spread Case Study as of Tuesday’s Close (6/27/2023)
Figure 6: DE Case Study Risk Graph as of Tuesday’s Close (6/27/2023)
Figure 6: DE Case Study Risk Graph as of Tuesday’s Close (6/27/2023)

DE closed at 409.51 and earnings are estimated for August 18, 2023. The cost of this long premium case study is $908 and will be managed to a max risk of $750. When completing your scan, identify the max risk appropriate to your plan.

• Max profit (estimated $1130) occurs at the long put expiration (Sep 15) just below $385.

• Max risk ($908) becomes more likely for all Days to Expiration near the $460 level.

The intermediate term high price of 445.61 (Dec 2022) to exit with an expected loss will be used if that does not exceed the $750 max risk. A single close for either (price > 445.61 or a loss of $750) will result in an exit the next day. 

If the bearish MACD signal is successful, it’s possible DE could move quickly to the $385 level, dampening profits. Two exits are considered for an expected gain:

• DE at $380 (near the max gain level)

• DE at $360 (2 standard deviation band), if there’s an opportunity for reasonable adjustments

Again, I’m hoping to play around with this a little bit but that ultimately is for the market to decide. Fortunately, the tools we can access allow us to do that for new strategies without putting your money at risk. Take advantage.

Clare White, CMT

Always appreciate your education, Clare!

Tom Gentile
C1P: Chief 1-Percenter


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