When to Initiate an Options Trade Based on Technical Analysis

Tom Gentile

Posted in
Technical Analysis

By: Tom Gentile
March 13th, 2023

4 mins read

There will be a time or two (or more) in your options trading life where you will see a technical pattern you like form or forming during the trading day. It is at those times where you will feel compelled to go after an option trade based on that formation intra day before waiting to see if the pattern completes on a closing trade basis, meaning does the formation hold its formation at the close of trade that day.

This article will discuss why we feel there are times when it is appropriate to wait until the end of day before initiating a trade based on the technical pattern.

Will the Fed Hold Off Raising Rates at their Next Meeting?

During the day the markets looked like they were responding in a bullish fashion based on news the hassle in the Financial sector, primarily caused by the issues with Silicon Valley Bank and Signature, might cause the Federal Reserve to hold off on raising short-term interest rates in their next meeting.

Regulators approved plans Sunday to backstop both depositors and financial institutions associated with Silicon Valley Bank and Signature Bank.  They also said they are taking steps to protect the US Economy by improving peoples confidence in the banking system.

Figure 1 30-Day Japanese Candle Chart SPY with Current / Intra Day Piercing Pattern
Figure 1 30-Day Japanese Candle Chart SPY with Current / Intra Day Piercing Pattern

The next image, Figure 2, expands the chart to a 60-day view for SPY.

Figure 2: 60-Day Japanese Candle Chart SPY
Figure 2: 60-Day Japanese Candle Chart SPY

We captured figure 1 around mid-day because that is when the pattern that looked like a Piercing Pattern was formed/forming.  We expanded the chart view because Bullish Japanese Reversal patterns happen at support.  SPY is not quite at the price support over 60-days, but it is closing in on it.

A Piercing (Line) Pattern occurs when a bullish candle on Day 2 of the pattern closes above the middle of Day 1’s bearish candle body.

The decisions was do we initiate a bullish option trade off this pattern when the day has not finished, and we don’t know if this pattern will be their at the end of the trading day.

We decided to wait and encourage option traders to wait for the day to complete and truly form rather than risk taking a bullish trade intra day only to see it fail to be the reversal pattern at the end of the day and risk possibly being in a loss situation as a result.

Likelihood of the Fed Raising Rates

The likelihood of the Fed NOT raising rates this next meeting is far from 100%.  Quite the contrary as the news reports are stating the expectation by many is the Fed will still raise at least a quarter of a point.

Goldman Sachs seems to be the only institution that believes the Fed will pass on raising rates at their next meeting.

That may be why the sell off by the end of the day occurred and their was no longer a Piercing Pattern at the end of the day.

Figure 3: 60-Day Japanese Candle Chart SPY – NOT a Piercing (Line) Pattern
Figure 3: 60-Day Japanese Candle Chart SPY – NOT a Piercing (Line) Pattern

The day itself was a Bullish Reversal Day, but it did close lower from the previous day close, which is bearish.

If the security gaps higher on the open and closes higher on the day and in to the body or more of the bearish day two trading days ago it might set up as a potential Morning Star Reversal, so that will be interesting to see what tomorrow’s day of trade brings.

If a reversal of the recent short-term down trend is to occur we will see what technical Japanese Candlestick Bullish Reversal Pattern (the morning star?) occurs, if any, to use as a catalyst for a bullish option trade.

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