Tom’s Weekly Newsletter May 25th, 2022

Tom Gentile

Posted in Newsletter

By: Tom Gentile on May 25th, 2022 • 9 mins read

Originally published on May 18th, 2022. Subscribe for early access!

Another Bull Trap and Resumption of Bearish Market Activity

A Bull Trap is a ‘false’ pattern or signal that tends to happen in a bearish market environment ( a bear market).

In definitions I’ve heard and read over the years it’s said this pattern ‘tricks’ people into believing the markets have found a potential bottom and price will start trending higher from there.

I don’t believe anyone is trying to necessarily trick anyone, rather I could see it being asset managers having to put their money to work and what is seen is cost dollar averaging.

Whether this is 100% true or not, a bounce in the markets happen, people get to thinking things are going to be bullish again, financial news networks start offering this rhetoric of the markets being bullish today / they are recovering today and they start asking ‘is this the bottom’. And that may help a rally a bit more, but inevitably the market resumes its bearish trend to the downside.

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SPY Bear Trap
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SPY – SPDR S&P 500

The Fibonacci retracement number where the 38.2% retracement lies has not changed from last week; it is still 380.29.

The thing that has changed is the closing price of the SPY from last Wednesday’s close; it is down close to 3-points.

The bull trap was in clear view today with the markets selling off after a three-day win streak may have convinced some folks the markets may have found a bottom.

That’s the thing with these ‘traps’ as they continue to show up, give false hope and resume trading lower and as it was mentioned last week this is bearish.

Retail earnings numbers have not helped things this week.

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TLT – iShares 20+ Year Treasury Bond ETF

There was a time where I would have written up an analysis that the price action being seen on a day like today is indicative of the inverse trading relationship often seen between equities and bonds.

The markets had a major sell off today and bonds saw a bullish day.

There is a small triangle pattern, and this rice action today may have completed a slightly higher pivot low.

Though this IS what happened today, it is hard pressed for me to get too bullish on bonds since what the chart on TLT shows is that it too suffers bull traps.

The horizontal green lines indicate old support levels that were broken that could act as future resistance levels for TLT.

As long as more rate hikes are expected the markets way, it could remain tough sledding for bond bulls.

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UUP – Invesco DB US Dollar Index Bullish Fund

If the pattern shown on the SPY is described as a Bull Trap, might this be considered a Bear Trap since it is pretty much the opposite?

UUP is in a clear uptrend and over the few days equities saw a bounce and then a clear bearish day, UUP over that same time frame sold off a few days (giving indication the buying may be over) only to see it have a bullish reversal day today.

It is definitely a possibility.

With any  further downside in UUP I could see it testing just under 27.40.

This isn’t an asset I can see anyone trading options on as the scaling is very small, meaning what you are seeing in the chart on UUP is intervald on the grid spacing of $0.20.

The reason I continue to show this chart is the observation if the strength of the US dollar against a basket of foereign currencies is strong one could expect the opposite for equities.

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USO – United States Oil Fund, LP

Two trading days ago, I would have been prepared to say scratch what I said last week about getting too bullish on a breakout, because it had a bullish day and it closed at or near its highs.

But, as of today, and because it has traded lower the past two days and closed at or near its lows, a bullish breakout is at least put on pause.

It may still break out as their doesn’t seem to be any lowering of fuel prices any time soon.

Couple that with their still being two more months of expected bullishness in energy and oil based on its seasonal pattern from mid-February to mid-July.

Just because the high fuel costs are being attributed in part to the struggles of retailers who have reported earnings this week, doesn’t mean big oil will take pity on consumers and retailers and immediately lower their prices.

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GLD – SPDR Gold Shares

Green horizontal lines may be support levels GLS needs to hold before it makes a 100% fib retracement over time frame shown in chart.

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Call Credit Spread Education

One tactic or trading strategy we all can consider when the markets are bearish or even if we see a security trading at resistance and we have conviction for it trading lower is a Call Credit Spread.

To execute this strategy, one would Sell-to-Open an option at one strike price and one the same order ticket Buy-to-Open a higher strike price.

What one wants to see happen is the security stay below the option that was Sold-to-Open.

When one sells it to open, they are selling the markets the right to buy the security from the account at that price. If one sold the option to open without buying to open the other strike on the same order ticket they would be in a ‘naked’ position.

Naked means they do not own the security they just sold the markets the right to buy it from them for.

With the other strike bought to open on the same order ticket that ‘leg’ of the trade protects the account holder from being naked and therefore reduces the risk.

That’s because instead of having to go to the open market at buy the security at market price to replace at the sold strike the account should be able to exercise the right to buy the security at the bought to open price.

This is all done or SHOULD be automatically by ones broker under the manner of what’s called Exercise and Assignment.

The markets essentially call the security away at the one strike price (that was sold to open) and the account then exercises on the other strike price (that was bought to open).

PLEASE confirm with your broker how that works at their firm before considering this trading strategy.

The reason we’d even consider this strategy is because we really want the spread (both options legs of the one trade) to expire worthless and the account realizes 100% of the premium sold up front.

To give the account a possibility of the options expiring and realizing the full profit we educate everyone to position this strategy where one doesn’t feel the security will be at expiration.

We further educate on to sell to open the Call Credit Spread with a short amount of time until expiration. That way the Theta / time decay works for this position rather than against us.

Each day that goes by is one more day closer to expiration and that Theta or time decay lowers the price of the option (so long as the security doesn’t move or doesn’t move in the direction we do not want, which is towards the sold to open strike price.

One may even be able to Buy to Close the spread and pocket the difference between what it was sold to open for, thus still realizing a profit, freeing up any margin their brokerage may require and freeing up ones mind to focus on the next trade.

The goal we teach is to try and get an average of 1% ROI and to do this no longer than say 14 days out for expiration.

One of my friends, options trading colleagues and instructors for my company Mike Wade likes to also look for a news event that creates a large gap that he may find a spread based on where it gapped from, (he calls this tactic his Sniper Strategy).

Example: (May or may not have a news item as a component of the trade example).

Dollar Tree, Inc. (NASDAQ: DLTR)

It’s no secret the retail stocks, at least many of the big-name retailers like Costco, Target and Walmart have been beaten down with their recent earnings reports.

Many of them have gapped and/or trade down significantly and this would qualify as the news event Mike looks for.

Trying to find a call Credit Spread is tough on these because if you try and position a spread like this around where they gapped down from there is little to no premium to be made.

We found one on DLTR where, FOR EDUCATIONAL PURPOSES ONLY we are highlighting positioning the strikes a bit above the open price where it gapped down today and from there ran further down in price.

We are positioning this where we don’t think DLTR will be at next Friday expiration.

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This is a $2.50 wide spread. That is the initial risk, but if one were to get a fill for $0.26 to offset that risk ones total risk would be $2.24 ($2.50;ess the credit of $0.26 = $2.24).

That would make for a potential 38.89% ROI. Over 9 calendar days that equals a slightly better than 4% RIO average per day, (better than the 1% ROI goal on these short-term options trades.

If DLTR stay under the sold strike in the spread and this trade is carried to expiration and the options one keeps the full 100% of premium sold (which again would be a 38.89% ROI).

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App: Toms Option Tools

Market Insight articles may show images of lists of stocks meeting a variety of options parameters like Unusual Call and or Put activity or Expensive IV found on my app Toms Option Tools.

Other times I will have other charts may work to amplify my educational points. 

Those options data lists, however, can be found on my app Tom’s Option Tools. Use your device to search up and download this app and get free access to the Morning Reports section of the app.

Other parts of the app are available at a premium subscription rate, but the Morning Reports Lists are yours free.


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