By: Tom Gentile
on October 12th, 2022
Originally published via our newsletter previously. Subscribe for early access!
Thanks to everyone that sent your best wishes and positive thoughts to me and my family as we, and many others, endured Hurricane Ian.
We made it through, but not without some property damage, power outage and no internet for a couple days.
This pales in comparison to what many others experienced and so I offer MY best wishes and positive thoughts to all in their recovery efforts.
Speaking of recovery efforts, it’s possible that is what the market is doing today and the two previous trading days.
Many will all this a bear market rally and it may turn out to be, but that doesn’t mean there isn’t an opportunity to look through your scans to find short-term bullish option opportunities.
— Tom Gentile
C1P: Chief 1-Percenter
Corners of the Market
SPY – SPDR S&P 500
TLT – iShares 20+ Year Treasury Bond ETF
Despite the two technical items referenced last week that spoke to the possibility of at least a bounce coming the way of TLT, it has does nothing really to indicate it is going to break out of its bearish trend.
The two technical items referenced last week were a morning start reversal and a Darknet ‘R’ signal.
TLT did get a tiny price bump, but it didn’t amount to much.
TLT is still in its bearish trend channel.
Today it had a very narrow trading range, but one slightly encouraging thing is it did not trade at its close.
Instead, it had a wick / shadow under the candle body which means price rejection kicked in at its lows and it traded up off the low for the day.
This may lead to it making an effort to break out eventually.
UUP – Invesco DB US Dollar Index Bullish Fund
There are times Japanese Candle Reversal Patterns play out better than others.
The Bearish Engulfing Pattern, highlighted by the orange rectangle in the chart image above, clearly ended up being a decent reversal signal.
One thing I have mentioned in the past is the inter-market analysis between certain corners / sectors of the market.
Often times when the dollar is strong that means there may be weakness in US equities.
Where last week it could have been deemed the markets were oversold the opposite could have been said for UUP in that it was overbought.
So, it may not be that coincidental the UUP sold off with the pop in the SPY.
Will the current price hold as support or is there more downside coming?
USO – United States Oil Fund, LP
The U.S. has been trying to get more oil pumped into the markets to help the global economy.
Today, OPEC+ (OPEC and 23 non-OPEC partners) agreed to impose deep output cuts.
Their intent is to spur a recovery in oil prices.
The cut was for 2 million barrels was deeper than that of some oil analysts were expecting; by almost twice as many barrels.
Despite President Biden and US Congress pushing for more output to lower prices, OPEC+ decided today to cut back.
USO, which I use to represent oil and energy traded higher on the day and this news is deemed the catalyst for it. Olde support was 70 and USO has broken out above that.
GLD – SPDR Gold Shares
GLD broke out of its bearish channel highlighted in the GLD chart last week.
Not only has it broke out of that channel, but it also broke above what could be deemed an old / previous support price of 158.
There are times when the first day of a price breakout above a resistance it could suffer what’s called a false breakout. This is where it breaks above that resistance for a day and then falls back in to its bearish pattern.
That hasn’t happened with GLD. It closed above the 158 price now three trading days in a row.
Typically, GLD and SPY trade inverse to each other, but both are seeing a bounce likely due to the assessment both were oversold and to some prices are/were deemed attractive. I have no problem with both gold and equities running in tandem for a while.
From the Desk of a CMT – COF Case Study Update
A quick view of the COF bear call spread case study back test displays moderate movement in a single spread until you think about the per spread credit ($25) and risk ($175). It is relative.
The $25 credit reflects entry at the midpoint quote, so moderate swings can still be impactful for the position.
The daily chart (650 trading days) displays a recent bounce that remains within an overall decline for COF.
Our exit for a loss is with one close above resistance at the 50% retracement level; however, the 65-day simple moving average (SMA) may provide some resistance before reaching this level.
Before assessing current market conditions, let’s see how the bid-ask spread has historically impacted slippage for these options.
The first series of charts is our short option and the second series, the long option.
Declining IV is beneficial to the position in the first series, but not the second. In each case there was a narrowing of the bid-ask spread early; however, we should expect it will remain an issue through the life of the spread. In this example, an exit 2 days after the earnings report puts us at 10/27, the day before expiration, with a potential IV crush providing an overall benefit to the case study.
As an important note, I never advocate allowing an out-of-the-money (OTM) option to expire worthless. Anything can happen in these markets and actively managing a position to the extent you can means your managing your risk – it’s important.
SPY Market Proxy
Despite the latest question of whether or not the Fed will continue raising rates at an aggressive rate or whether a pivot comes, it makes most sense to simply focus on “what is” for the markets.
This article series on relative strength (or weakness) focuses on a 26-week timeframe via the 130-day SMA and a half cycle of 65-days. So rather than speculating on whether or not this week’s economic reports favor a hawkish or dovish fed response, we can look at what the markets are telling us.
Since mid-March, the 65-day SMA has been below the 130-day SMA as a somewhat volatile, overall decline in SPY has unfolded.
Figure 6 reduces the trading days to 150 so it’s easier to see we have sideways action in the 65-day SMA and a continued decline the 130-day SMA.
Despite a strong move up for SPY on Tuesday October 4th, we can objectively say our market proxy remains in a decline.
Although our risk management rules are driven by COF movement, the barrage of serious news and speculation we’re encountering daily highlights the importance of finding simple, objective tools that can help ground you. There’s a book written by Ned Davis with a title that will stick with me forever, “Being Right or Making Money.”
I’m not a money driven person but this idea is so important for me as an analyst – why are we in this? Don’t try to be right, have a plan and manage your risk.
To put a wrap on things this week, Figure 7 displays the 7-30 day at-the-money (ATM) implied volatility chart over the last year.
The next article will post the day after earnings are expected and it appears we could see an IV crush post-earnings.
As a reminder, here are the exit rules and guidelines:
- Timed exit within two days after the next earnings (expectation IV will drop)
- Exit after one close above 110 for COF
- Max risk of $500 – this applies for spreads above 2 contracts
Clare White, CMT
Stock and options trading has large potential rewards, but also large potential risk.
You must be aware of the risks and be willing to accept them in order to invest in the stock and options market. Do not trade with money you cannot afford to lose.
This is neither an offer to buy/sell/ or recommend a particular stock or option.
Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not been actually executed, the results may have under or overcompensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with hindsight.
No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.
Disclaimer of Warranties and Liabilities Tom Gentile and TomsTradingRoom, LLC including employees, consultants, and editors (“Publisher”) cannot and do not warrant the completeness or accuracy of the content found in our areas, or its usefulness for any particular purpose.
Tom Gentile and TomsTradingRoom, LLC also make no promises that our content or the service itself will be delivered to you uninterrupted, timely, secure, or error-free. Under no circumstances will Tom Gentile and TomsTradingRoom, LLC be liable for direct, indirect, incidental, or any other type of damages resulting from your use or downloading of any content on our site.
This includes, but is in no way limited to, loss or injury caused in whole or in part by our negligence or by anything beyond our control in creating or delivering any portion of Tom Gentile and TomsTradingRoom, LLC.
You are agreeing that you bear responsibility for your own investment research and investment decisions. You also agree that Tom Gentile and TomsTradingRoom, LLC will not be liable for any investment decision made or action taken by you, or others based upon reliance on news, information, or any other material published by Tom Gentile and TomsTradingRoom, LLC.
Tom Gentile and TomsTradingRoom, LLC relies on various sources of information that we believe to be accurate and reliable. However, we make no claims or representations as to the accuracy, completeness, or truth of any material contained on our site.
Tom Gentile and TomsTradingRoom, LLC are educational portals, providing content for educational and informational purposes only. Neither Tom Gentile nor TomsTradingRoom, LLC are a broker/dealer. Investors need a broker to trade stocks and options and must meet certain requirements. All securities, futures, and investments data and ideas are offered to self-directed investors. All prices in USD unless noted otherwise.
A full disclaimer can be found here: http://www.tomgentile.com/legal_disclaimers.html.