By: Tom Gentile
on June 28th, 2023
Originally published via our newsletter previously. Subscribe for early access!
Is the Top in on the NASDAQ?
In my Market in Focus, I will show three chart variations on the ETF I use to gauge technical, directional sentiment on the NASDAQ, It is the ETF known as the Q’s.
The thing I want to point out is the reversal pattern I see.
Reversals: both Bullish and Bearish reversals are searched for in the charts.
Realize trying to pick tops and bottoms in the markets can be a risky game, for once you believe the markets are going to trend one way they reverse up or down. Also note, stocks that are oversold can stay oversold and trend lower just as they can be overbought and stay overbought, trending higher.
Reversal patterns are a means to gauge when a security may reverse course of its current trend. Options traders can trade based on the pending reversal and if they do that reversal point can act as a technical stop point if they wish.
— Tom Gentile
C1P: Chief 1-Percenter
Market in Focus
Should the Q’s continue to sell off one can use a variety of means to assess a price point lower as either a target for the stock on a bearish options strategy or as a support level one can then look to initiate bullish options strategies on.
One such means of technical analysis is Fibonacci Retracements.
From a bulls perspective it may not be too encouraging to see the prospects of the Q’s lower to either of the 3 fib levels as it may cause losses on any existing option positions.
But, for fresh new options trades it may be a welcome scenario for one of those to become new support.
From the Desk of a CMT, , Earnings Rankings, LMT Review
Last article a scan to search for past positive earnings surprises was run and LMT selected as a bullish case study. Although the stock performed well after the article posted on 6/1/2023, the exit for a gain was too focused on Fibonacci resistance which was pretty far away for a three-week time frame. A method to find prospects is really good, but a sanity check on time for the strategy makes sense for profit taking opportunities.
As a quick review, the scan is accessed from the following menu selections:
Stocks Stock Rankers Earnings Rankings
Scan for Most Actual Earnings > Estimated (S&P 100 Optionable, 5/30/2023)
32 stocks had 8 for the Num of Earnings with actual exceeding estimated, so the top 32 stocks were saved to a new list called Earnings Beat, including LMT.
The Fibonacci chart option was selected to identify objective support and resistance areas.
You can also consider recent lows rather than support or highs for resistance to identify objective areas for exits, but it must be rules based with the exit for a loss stating a specific value.
Using the Fibonacci levels for LMT we have:
- Objective support at 432.81
- Objective resistance at 501.41
LMT’s close was 447.97 on 5/30/2032.
IMP: As a sanity check, consider adding the most recent closing highs and lows with short-term strategies to align the time horizon and remain objective, minimally for some profit-taking.
At-the-money (ATM) implied volatility (IV) was acceptable for a long call strategy, earnings had passed (so no IV spike expected), and momentum was bullish as seen with MACD.
A Smart Search was used to identify a long call with odds of 1.2 to 1.
A case study with 24-days to expiration was referenced, but this is reasonably short-term for the first point of overhead resistance.
These case studies generally focus on applying different scans, reviewing conditions, and managing risk, but taking profits is important too.
Always have specific exits in mind as part of your strategy.
Exit for a Gain
Taking profits is an extremely challenging part of your job. We can see in Figure 2 that LMT met resistance at both the 50-day and 200-day SMA recently.
On June 6th the 200-day SMA contained LMT; however, it pushed through the next day. On June 8th the 50-day SMA served as resistance, but this persisted the following day.
This is where a two-day filter can be useful, with an exit on the open after price had two closes below resistance (June 9th resulting in an exit the morning of June 12th).
Using recent highs and lows, you have to think about exits for a gain differently than a loss. In the loss case, your rule may identify a recent low with a two-day filter, or 2 closes below that low. Acknowledge you’re taking more risk with this method.
There are two considers when you use a recent high to exit for an expected gain with a bullish strategy:
- Price fails to surpass a recent high or
- Price makes a new high.
In the first case, “fails to surpass” indicates a lower high below the recent high which you can act on once the high is confirmed (the next day closes lower) or require two closes lower.
I simply have a preference for this confirmation, but you have to decide what is best for you.
In case two, you don’t want to exit a bullish strategy when price is moving above a previous high – you need to wait for a high to be put in place which is confirmed by a close lower than previous day.
Again, my preference is to require a second close lower as a filter. In the chart above, this would add a day to the exit, so price makes a high on June 8th which you can identify after the lower close on June 9th.
Requiring a second lower close takes you to June 12th and an exit on the morning of June 13th.
To get a sense of the impact of these alternate profit taking exits, figure 3 provides information for an updated long call, entered on June 1st instead of May 30th when the article posted and figure 4, the Back test data for it.
A firm fixed price is critically on the exit, so you know your risk. Things are a little different when you’re taking profits.
That said, you still need to have a plan and different areas of nearby support/resistance can help you with that.
Clare White, CMT
Thank you, Clare!
— Tom Gentile
C1P: Chief 1-Percenter
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