Tom’s Weekly Newsletter July 6th, 2022

Tom Gentile

Posted in Newsletter

By: Tom Gentile on July 6th, 2022 • 7 mins read

Originally published on June 29th, 2022. Subscribe for early access!

Happy 4th of July!

Wishing everyone a Happy and Safe 4th of July!

We are at the end of the first half of the year.

There is much work for the Fed to do in its efforts to fight off inflation that’s at 40-yr highs, the Russia-Ukraine conflict is still going on, we have slowing consumer spending and home sales and more interest rate hikes seem to be coming.

Despite all this I still believe in the markets and will work to capitalize on a market environment which is more bearish than bullish right now.

I believe in this country and no matter what we are going through currently, over time, I believe the prospect of prosperity will be there for us all!

Tom Gentile
C1P: Chief 1-Percenter

Four Corners of the Market

SPY - SPDR S&P 500 
SPY – SPDR S&P 500 

SPY is at a tricky spot technically speaking for forming a directional bias for it.

It is up oof the recent pivot low.

It had gapped down to 380 prior to making that low. That could have acted like an old support point becoming new resistance, but SPY bounced p to hit a resistance at 390, instead.

It has now rolled back a bit to test that 380 point as a potential support.

IF is a commonly used word for technicians as in, IF buyers step in at this price point and start accumulating SPY and equities overall this could be support and we get a bounce or even better another up leg taking out the prior pivot high at 390.

If buyers don’t step in and instead selling continues we could attack the lows, which is the start point of this recent up leg.

TLT - iShares 20+ Year Treasury Bond ETF
TLT – iShares 20+ Year Treasury Bond ETF

TLT bumped up against the 114-price area now a couple of times, which gives a bit more visual conviction that this price area could be resistance.

That price area was previous support so that technical pattern is with TLT, but there is another technical pattern that may be forming that if it resolves itself to the upside could bring about a decent pop for TLT.

I annotated the chart above with an inclined or upward sloping support line indicating the recent price action is headed up.

At this juncture it remains to be seen if TLT breaks out above resistance of this triangle pattern.

If it does one could take the widest distance of the triangle and calculate the price amount difference, then add that price amount to the price point of the breakout.

That could be a price target for TLT if it indeed breaks out.

UUP - Invesco DB US Dollar Index Bullish Fund
UUP – Invesco DB US Dollar Index Bullish Fund

It has been said various times there tends to be an inverse correlation between the US Dollar and US Equities.

Take a look at the chart on the SPY the last 3-trading days and the same on UUP and you can visually see this being the case.

IT is not a perfect inverse correlation, but it happens enough that when assessing a directional expectation for equities I like to look at a chart on UUP to see what its price action looks like.

Note the price intervals to the left of the chart aren’t large.

The price move in UUP isn’t that robust and thus, I don’t attempt to trade it nor options on it.

Again, I analyze the chart on UUP as a gauge to assess potential direction of US equities.

USO - United States Oil Fund, LP
USO – United States Oil Fund, LP

Darknet B Bullish signal which is pivot low (1). Bearish Candle Reversal Pattern  – Bearish Engulfing Pattern (2).

Real short-term leg down that from a Fibonacci retracement perspective shows the reversal pattern happened at the 50% Fib level. Might portend another move down.

Reversal Pattern at the 50% Fib Level
Reversal Pattern at the 50% Fib Level
GLD - SPDR Gold Shares
GLD – SPDR Gold Shares

Regarding GLS trading in a box range as pointed out last week, here we are a week later, and it is still in the box range.

GLD is doing a slow drift lower and is nearing the support of the box range.

I am not into making predictions so stating what it will do once it gets there, if it does, is not what I will even try to do.

One can anticipate it bouncing higher off support, but I won’t even entertain that until it gets there.

As an options trader long call options can be declining in price due to time or Theta decay (along with a slow drift lower in price).

Long-term I am not as bullish GLD as I had been in the past. For disclosure know that I have lightened up on some of my GLD.

From the Desk of a CMT: MDLZ and an Outside Day

Monday’s market action showed some signs of broad sector strength that followed through Tuesday morning; however, not too far into the market day bearish reversals started taking hold. Quite a few stocks had Outside Days, which is a daily part that exceeds the previous day’s high-low range.

Image 30

In addition, some of these stocks (such as MLZ) had a close that was near the low for the day which prompted a view MDLZ’s daily chart with Fibonacci levels. Figure 1 displays this chart with the 50-day & 200-day simple moving averages (SMA’s) which may provide some resistance.

Figure 1: MDLZ Daily Chart with Fibonacci Levels and 50-day & 200-day SMAs (Tuesday, 6/28/2022)
Figure 1: MDLZ Daily Chart with Fibonacci Levels and 50-day & 200-day SMAs (Tuesday, 6/28/2022)

Although the outside day pattern can be short-term in nature, the chart view above shows an intermediate-term downtrend that is also underway. This case study uses the basic pattern reversal and the next higher level bearish trend to establish a basic put position that is out of the money (OTM).

We’ll use the Fibonacci levels to set a price target at $55.15 (the 50% retracement level) since the intermediate term bearish trend (as objectively identified by a downward trending 50-day SMA) suggests a low below the 38.2% to remain intact.

Figure 2 displays the option chain for September 2022 monthly puts on Tuesday, June 28th, after the close. An OTM long put is expected to experience accelerated time decay at the 30-days to expiration mark, so a September expiration gives the position 6 – 7 weeks to playout.

Figure 2: MDLZ September Expiration Put Option Chain (Tuesday, 6/28/2022)
Figure 2: MDLZ September Expiration Put Option Chain (Tuesday, 6/28/2022)

Decent open interest favors the 55 puts over a lower OTM value. Here are the case study details:

Buy to open: 10 MDLZ Sep 55 puts @ $0.85 for a net debit of $850

  • Max Risk: $500 (put premium at $0.35)
  • Stock risk: 2 closes above the 200-day SMA (exit at the next open)
  • Timed Exit: August 19, 4 weeks prior to expiration
  • Profit target 1: 38.2% Fib level of 58.26, partial profits (40%)
  • Profit target 2: 50.0% Fib level of 55.15, remaining profits (60%)

Figures 3 & 4 display the case study position information and price and risk graphs, respectively.

Since the next trading day after this article is on a Thursday, consider requiring MDLZ price to be above $60 and reassess the put premium and delta.

Also, watch Friday for some potential bullish seasonality heading into the holiday weekend.

Figure 3: MDLZ Sep 55 Puts on Tuesday, 6/28/2022
Figure 3: MDLZ Sep 55 Puts on Tuesday, 6/28/2022
Figure 4: MDLZ Price Chart & Risk Graph (Tuesday, 6/28/2022)
Figure 4: MDLZ Price Chart & Risk Graph (Tuesday, 6/28/2022)

Note that we may be holding the case study through earnings and will watch implied volatility for any opportunities around increasing levels.

Have a great 4th of July.

Regards,
Clare White, CMT


Thanks, Clare!

Tom Gentile
C1P: Chief 1-Percenter


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