Tom’s Weekly Newsletter – Oct 12th, 2022

Tom Gentile

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By: Tom Gentile
October 12th, 2022

7 mins read

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.

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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 

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TLT – iShares 20+ Year Treasury Bond ETF

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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

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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

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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

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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.

Figure 1: COF Oct 28 110-112 Bear Call Spread Back test
Figure 1: COF Oct 28 110-112 Bear Call Spread Back test

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.

Figure 2: COF Daily Chart with 65-day & 130-day SMAs and Fibonacci Retracement
Figure 2: COF Daily Chart with 65-day & 130-day SMAs and Fibonacci Retracement

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.

Figures 3 & 4: Option Charts for COF Oct 28 110 Call and 112 Call
Figures 3 & 4: Option Charts for COF Oct 28 110 Call and 112 Call

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.

Figure 5: SPY Daily Chart (650 trading days) with 65-day & 130-day SMAs and Fibonacci levels
Figure 5: SPY Daily Chart (650 trading days) with 65-day & 130-day SMAs and Fibonacci levels

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.

Figure 6: SPY Daily Chart (150 trading days) with 65-day & 130-day SMAs
Figure 6: SPY Daily Chart (150 trading days) with 65-day & 130-day SMAs

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.

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Figure7: COF ATM-IVs 7-30-day

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


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