Tom’s Weekly Newsletter Nov 2nd, 2022

Tom Gentile

Posted in Newsletter

By: Tom Gentile on November 2nd, 2022 • 7 mins read

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

Earnings for Tech Stocks not Getting Off to a Great Start

Today After Market Close (AMC) the earnings numbers for Meta Platforms (NASDAQ: META), formerly known as Facebook, Inc. missed expectations.

The revenue numbers were reported as a beat of expectations and the stock is trading down over 7% at the time of this writing.

Yesterday earnings from a couple of tech giants, Microsoft (NASDAQ: MSFT) and Alphabet, Inc. (NASDAQ: GOOGL) came out and along with that their forward-looking guidance.

MSFT earnings beat by just a few cents and their revenue numbers were break even for the most part. What didn’t help them, or the NASDAQ was their lowered expectations for next quarters revenue.

GOOGL missed their earnings and revenue expectations. Revenue was still up from last year, but they are experiencing low(er) ad revenue. Their stock was down over 7% after the close yesterday. Today based on the close it showed down over 9%.

The NASDAQ ended up trading down 222-points on the day as these two misses set the tone for selling and this miss from META didn’t help the outlook for the NASDAQ in the short-term.

I might be wise to look for potential support areas on these so if /when they hit those a bounce may come and give us a bullish opportunity then.

Tom Gentile
C1P: Chief 1-Percenter

Corners of the Market

SPY – SPDR S&P 500 

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TLT – iShares 20+ Year Treasury Bond ETF

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The bond market has had as much of a tough time this year as equities.

Equities has experienced some bear market rallies, but TLT just can’t seen to even muster any of those.

If you take the two days the green arrow is pointing two as a small cluster this could have been an island cluster. Usually, a cluster is a bit more days than just two.

If you do what is a blended / or blend candlesticks together those two become one candle and this is more of a Morning Star Reversal.

Although this possible reversal and the las two consecutive were bullish days and gapped higher both days, TLT is still within its longer-term bearish trend.

What would be significant for bond bulls is if TLT broke above the descending resistance line and held that break out without falling back in to the trend.

UUP – Invesco DB US Dollar Index Bullish Fund

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UUP, (my representation of the US Dollar) has stopped making new all-time highs.

It tries to muscle its way back up there, but the last two times it failed to make new all-time highs and retraced.

Also note that each time it tried to get back up there it fell short making a lower high.

This is bearish.

The bearish day today closed at it day’s low, and it also closed at a horizontal support price area.

If equities continue higher the inverse relationship may bring a break of support and take it lower.

If equities run out of steam on their recent advance then a support area may get hammered out on UUP.

USO – United States Oil Fund, LP

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USO is currently in a slight down trend since roughly mid-July.

Oil and Energy had been the strongest performing sector. Even though it is holding up for the year with positive gains (on USO), it is off its years highs.

It is a bit off the mid-point of the slight downward channel, in the sense it is trading near the resistance price area of the channel.

I have highlighted with short yellow-orange lines in the shape of V’s to emphasize what could be a reverse head and shoulders price pattern.

Should this pattern bring about what it typically indicates, which is a prospective bullish reversal, USO may trade higher.

It has to contend with resistance of the downward channel but should it clear that I would anticipate a resumption of strength to the upside.

GLD – SPDR Gold Shares

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It has been a couple of weeks since our last weekly newsletter, but the question of GLD will break higher or trend back to its year lows was answered.

It did indeed trade back to its year’s low-price area.

A double bottom pattern formation is what you all see which may be the support price area for GLD.

It is for now since it is up from that price area the last 5-trading days.

Another prospective bullish signal that has formed in the chart is the Darknet scan is picking this up as a possible support by flashing its Darknet ‘B’ Bullish pattern.

Should GLD see a bounce it has the overhead, descending resistance line to contend with.

From the Desk of a CMT – COF Earnings… Thursday after the Close

The initial estimate for Capital One Financial (COF) earnings was Tuesday October 25th but per their website, it’s Thursday after the market close. We’re in good shape from a risk standpoint on this one, but it is a good reminder to verify the earnings date when there are implications for your strategy.

I tend to go to the source, by accessing the Investors section for the company (usually located as a menu bar item across the top or in the listing at the very bottom of the page).

https://investor.capitalone.com/news-releases/news-release-details/capital-one-financial-corporation-webcast-conference-call-69

 If short-term at-the-money (ATM) implied volatility (IV) follows its past cyclic rise into earnings, IV should rise into Thursday October 27th. Don’t wait until Friday to cover your riskfor this bear call spread expiring October 28th.

Figure 1 displays the current view for COF’s 7-30-day ATM IV and the pattern seems to be holding.

Figure 1: COF 7–30-day ATM IV on Tuesday, October 25th
Figure 1: COF 7–30-day ATM IV on Tuesday, October 25th

I updated the case study with a Thursday, September 29th close, which provided a credit that was $5 lower than the Tuesday set-up. Figure 2 & 3 provide risk data and back test history for the update.

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Figure 2: COF Oct 28 110 – 112 Bear Call Credit Spread (9/29/22), as of Tue Oct 25th
Figure 2: COF Oct 28 110 – 112 Bear Call Credit Spread (9/29/22), as of Tue Oct 25th

As mentioned, when this case study was originally viewed, the back test displays moderate movement in a single spread, but a $5 change for a strategy that was entered for a $25 credit is significant.

COF has been in an uptrend since late September but would require close to a 10% move to reach the lower strike of 110. Headwinds include the 65-day simple moving average (SMA) around $104 and the 50% Fibonacci retracement level at $110. Note the 135-day SMA is near the same level. It does seem COF found some support near the 61.8% Fibonacci retracement level at 103.95. The daily chart for COF is provided in Figure 4 (650 trading days for the setting).

Figure 3: COF Oct 28 110-112 Bear Call Spread Back test (9/29/22), as of Oct 25th
Figure 3: COF Oct 28 110-112 Bear Call Spread Back test (9/29/22), as of Oct 25th
Figure 4: COF Daily Chart with Fibonacci retracement Levels and 65-dy & 130-dy SMAs on 10/25/22
Figure 4: COF Daily Chart with Fibonacci retracement Levels and 65-dy & 130-dy SMAs on 10/25/22

Lots of Speculation

There remains a ton of speculation about the Fed and the best we can do is have a routine that helps us stay anchored in “what is” for the markets. It may be an assessment of different moving averages, other technical indicators, or the movement in a variety of preferred stocks and/or ETFs. As option traders, we must assess IV conditions too as part of the process. 

Whatever it is, keep that routine in place and be prepared to shift course when the market tells you to do so. Have a plan that manages money and your risk, and your far along in reducing the noise and taking actions based on your guidelines or rules.

We’re getting pretty big swings in each direction, and I do tend to place more value in market structure type movements than headlines – short covering, hedging activities, blackout periods for buybacks, and similar factors that impact daily volumes. 

For now, as long as Jerome Powell indicates fighting inflation is a top priority and we still have inflation reflected in our data, I have to believe rate increases will continue. There is so much speculation about this, but I don’t where it gets traders. Does guessing the correct future fed pause date translate to profitable strategies for today’s trades? I doubt it. It’s the things that you analyze on a regular basis that will make the difference for you.

Regards,
Clare White, CMT


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