Tom’s Weekly Newsletter – Oct 5th, 2022

Tom Gentile

Posted in Newsletter

By: Tom Gentile on October 5th, 2022 • 8 mins read

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

I am likely going to be dealing with Hurricane Ian, or should I say we are dealing with it right now and it hasn’t even hit land yet at the time of this newsletter.

I have Jay filling in with the Corners of the Market portion of this newsletter and I have our trusty Chartered Market Technician Clare White providing her invaluable insights and education in her piece, ‘From the Desk of a CMT’.

To everyone that like myself is going to be dealing with this hurricane my good thoughts and hopes are for us all to get through this safely and with as minimal damage as possible.

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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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UUP – Invesco DB US Dollar Index Bullish Fund

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One of the things Tom teaches others and he himself focuses on is inter-market analysis.  This is where one asset class or sector or industry of stocks trade either in a correlated fashion or is there an inverse correlation going on between two or more.

This year the US Dollar, represented by Tom with the UUP, has been traded at all-time highs over and over again.

This has happened all the while the other corners od the markets have been trading lower.

Equities and other corners of the market had a bullish day today and sticking with the inverse correlation between UUP and the others, UUP trade down on the day.  It had a bearish reversal day.

The two-day candle pattern between today and yesterday has formed a Bearish Engulfing pattern, which may speak to a decline in UUP for right now.

USO – United States Oil Fund, LP

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Looking at last weeks newsletter it was written USO dangerously close to breaking long-term support.

USO did break support last Friday with a decent sized gap down, or what the Japanese (with Japanese Candlesticks charting) call a ‘window’.

We had a bullish day today with an up window or gap up and the fact it closed at or near its highs of the day give indication we may see higher prices in the short-term, next day or two.

The concern is the overhead price resistance at both the 58 and 70 price level.

Those were previous support levels and as Tom teaches and regularly emphasizes these old support price areas could become new resistance levels.

If price does break above those levels it would be nice to see it backed up by strong volume.

GLD – SPDR Gold Shares

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GLD looks like it wants to break out of the downward channel.  It hasn’t really done that just yet, but today’s price action has it right on the cusp of doing so.

There is no Darknet signals exemplifying a bounce from that scan perspective is out there on GLD right now.

If you look at this chart and compare it to the other charts in this ‘Corners of the Market; portion of the newsletter, except for the chart o UUP, you will see the price action is very similar.

Similar in that they all had up windows or gaps up on the day, a bullish day closing at or near their day’s high.  This speaks to all these stock being more correlated with each other than not.

The key is to now decide to either try and trade bullish options on these ETF’s or strong stocks in these sector ETF’s holdings to do so.

From the Desk of a CMT SPY – Signaling Bearish Preference

Relative Strength (RS) can be used to find relatively strong or weak sectors. Last article we added the concept of an objective signal to identify bullish or bearish conditions for SPY so we can target strong sectors (bullish) or weak ones (bearish) rather than both ends of RS.  

A basic 65-day simple moving average (SMA) was selected to accompany the 26-week RS settings. Although using days will create a slightly noisier SMA than 13-weeks, it approximates a half-cycle of the primary setting we’re tracking. 

  • Bearish = SPY price below its 65-day SMA (approximates the 13-week SMA)
  • Bullish = SPY price above its 65-day SMA

This will be improved over time, but for now it reduces subjective assessments. Figure 1 displays the SPY daily chart with the 130-day (approximates 26-weeks) and 65-day SMAs. There is a clear preference for bearish strategies.

Figure 1: SPY daily Chart with 65-da & 130-day SMA’s
Figure 1: SPY daily Chart with 65-da & 130-day SMA’s

The volatility-adjusted RS model has Materials (XLB) & Financials (XLF) persisting as weak sectors. Note the one-week improvement for XLF to a rank of 7 was short-lived. Recall many systems that use an RS approach maintain a position with a move to 7 (weak) or 3 (strong), and only close the position when a move to 6 (weak) or 4 (strong) occurs.

Figure 2: Risk Adjusted ROC RS (9/6/2022)
Figure 2: Risk Adjusted ROC RS (9/6/2022)

Using XLF Components for the List Symbols on the Toms stock chart, I scrolled through financials and founds stocks that fit two criteria outlined last article:

  • Scroll through the charts to find a bearish scenario with some room to the downside (Fibonacci level or SMA)
  • Favor a component stock with nearby upside resistance (Fibonacci level or SMA)

As a reminder, here are the XLF component stocks as of 8/30/2022:

JPM BAC WFC SPGI MS GS SCHW BLK C AXP MMC CB PGR CME PNC TFC USB AON ICE MCO MET COF AIG TRV AJG MSCI PRU AFL ALL MTB BK AMP DFS FRC TROW STT SIVB FITB WTW HIG NDAQ RJF RF NTRS HBAN CFG PFG KEY SYF FDS CINF BRO WRB CBOE SBNY L CMA RE MKTX GL AIZ ZION LNC BEN IVZ

Here are five of those charts:

C: Citigroup
C: Citigroup
CME: CME Group
CME: CME Group
USB: US Bank
USB: US Bank
MCO: Moody’s
MCO: Moody’s

It seems large banks is the weakest industry within the financial sector and brokers and insurance companies are faring better. Although CME Group seems to have some room to run, other exchanges are a bit stronger, so I’ll leave that alone. You may want to track whether CME leads the others down if that suits your style.

The last chart is COF: Capital One Financial and we’ll see if a bearish case study can be introduced for this stock. Note a recent break of the 61.80% Fibonacci retracement level (94.02) has room to run all the way to a 100.0% retracement at 42.27. Is this a prediction? No. With a close at 91.39 on Tuesday (9/27), there is not obvious immediate support below; however, it’s not far to overhead resistance. If a case study is viable (strategy that suits volatility conditions, longer time horizon, and narrow spreads to minimize slippage), we’ll use two closes above this resistance area as our risk managed exit.

Do note earnings are expected in 28 days.

COF: Capital One Finance
COF: Capital One Finance

Figure 8 shows that COF implied volatility (IV) for the > 90-day ATM options is elevated over the longer-term and short-term.

In addition, three of four earnings reports were accompanied by increases in IV which may bring an early opportunity to close a position leading into earnings (if long premium) or immediately after (if short premium).

High relative IV favors a strategy that is short premium.

Figure 8: COF >90-day ATM IV (Tues, 9/27/2022)
Figure 8: COF >90-day ATM IV (Tues, 9/27/2022)

Switching to the Smart Search tool (Searches > Multi Strategies > Smart Search), we’ll select a Bear Call Credit which is the High IV, bearish strategy option.

The max days to expiration for this selection is 38 or less and the 7 – 30-day IV chart similarly indicates a relatively high IV for this timeframe.

The top 12 bear call credit strategies returned appear in Figure 9.

Figure 9: COF Bear Call Credit Spreads from Smart Search
Figure 9: COF Bear Call Credit Spreads from Smart Search
Figure 10: Oct 28 Long 112 Call – Short 110 Call for Credit of $25 (Tues, 9/27)
Figure 10: Oct 28 Long 112 Call – Short 110 Call for Credit of $25 (Tues, 9/27)

Wide spreads mean we do need to use quote midpoints to minimize the impact of slippage – this is more likely to be filed since this spread is naturally hedged.

Referring back to the stock chart, note the 110 level is the 50 % retracement for COF. This is a better strategy=driven resistance level and remains objective and fixed.

Figure 11: Risk Charts for COF Bear Call Credit Spread
Figure 11: Risk Charts for COF Bear Call Credit Spread

Here are the exit rules and guidelines for the exit if conditions still warrant entry after this article posts:

  • 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

Note the small credit does favor more contracts to overcome the cost of commissions and slippage but you must still manage your max risk. As a reminder, it is tougher to hit a targeted option price when spreads are larger.

Before signing off for the evening, please know thoughts and prayers are going out to those facing Ian tonight.  

Regards,
Clare White, CMT


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