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Double Tops & Double Bottoms

Right now as I write this article in October of 2019, the market is looking for evidence of a double top OR double bottom in SPX. Let’s review what it takes to confirm either one. Then let’s review the targets we look for when one is confirmed. 

A double top or double bottom is a sign of exhaustion of the prevailing trend. The double top or bottom is not confirmed though until the major swing high or low before it is taken out. 

The current example in 2019:

In July of 2019 we printed the current SPX ATH at 3028. 

At the start of a new month, a sell program kicked in and SPX was taken down 206 points within the first few sessions of August to a low at 2822. 

The market managed to hold above that low over rest of the month of August. 

At the start of the new month a buy program kicked in, and by mid September SPX reached a high at 3022. 5 points shy of the ATH made in July. 

At the start of yet another new month October, a sell program kicked in and took SPX down to a low (so far as of this article) at 2855. 

In order to call the move up to 3022 a double top, we have to break below the August low at 2822. 

In order to call the hold above 2822 a double bottom, we have to make a new ATH above 3028.

Caveat, An extra level that could be a target below 2822 is the  June low at 2728. Since the Aug low held the previous swing low in July by about 100 points, it stands to reason there is a test the market wants at 2728.  A hold above 2728 and reverse on SELLER EXHAUSTION could prove to be a new double bottom. However, we would still need to see a new ATH over 3028 in order to confirm that. Yes, a 300+ point move would be needed just to bring in the new wave of buyers that would dispel the idea of a double top. But if we scratch that level out of mix, and we use a targeting method, it goes like this...

We start with a double of the range made between the swing high (or ATH) and the swing low. 

If we've made a double bottom in Aug, the upside target would be: 3028-2822 = 206.  206+3028 = 3234 3234 would be the upside target to shoot against. 

IF we’ve made a double top in July, the downside target would be:  3028-2822 = 206 2822-206 = 2616 2616 would be the downside target to shoot against.

IF we were to hold above the June low at 2728 before we can get to 2616, turn and make a new ATH over 3028, then we confirmed a double bottom at the June low. Seller exhaustion will prevail. The new upside target for an ATH will be: 3028-2728 = 300 300+3028 = 3328 3328 would be the upside target to shoot against.

A great example of a double top was put in  last  year in Q4 of 2018 The resulting low made a double down, but then put on another 50% down as a climax sell kicked in on 12/26 driven by news that Treasury Secretary Steven Mnuchin, had called around to the top US bank CEO’s to ask about the solvency of the US banking system. Here is a link to a graphic that shows the double top of  2018 and diagrams what is explained as the targets for 2019 here in this article This link winds up taking you to a Tweet in my public account because the private account is locked and I cannot post links to the Tweets.

IF the link is not live, please copy and paste:  https://twitter.com/kiwitrader24/status/1180922583027466241?s=20

You can take this idea and the targeting method to any security you trade, AAPL, Bit Coin, Oil, ES, etc… The only thing a double top or bottom means is EXHAUSTION and the resulting target of putting on or taking off risk needs to be worth “their” while. Hence we start with a double of the move and take it from there. GL&GT! 

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Using Closing High/Closing Low To Signal Continuation or Exhaustion

This article comes at a time where we have just finished trading January week 3, 2019. We have a long string of green candles on our daily chart. All are wondering, when can I buy puts and not see them decay so quickly? Something we can look for to answer this, is a continuation pattern in the form of daily closing highs, or an exhaustion pattern in the form of failing to make a higher daily closing high. As we make new intraday highs that are meaningful, like right now we are making new 2019 highs each day, we have to see a higher daily closing high to go with it. IF we make a new intraday high for 2019 and then sell off at the end of the day to close below the previous closing high, that is the exhaustion signal. We can usually count on a pullback of 1% off the intraday (2019) high. We might see quite a bit more, but 1% is good starting point.

METHOD  Mark off the daily closing high on what you are trading in an uptrend, be it SPX, AMZN, NFLX, whatever. That becomes your benchmark. Watch for that level to HOLD or NOT on a closing basis. BE aware of that level if price moves well away from it, only to see it head fake you and come trading back to close below it, or hold above it.

The same thing can be used in an ongoing downtrend. 

In Q4 2018, we could buy calls and watch them go to zero, or we could wait for the exhaustion signal. We began to sell off from the 2018 and ATH in October, we ticked down each day for a new low on the month, the quarter, and finally we started making lower lows for the year 2018. Each day we needed to see LOWER CLOSING LOWs as well. IF we did not, if we made a lower intraday low and then buyers took us up at the end of the day to make a higher close than the existing closing low, we knew calls would have a better chance of working. 

REPEAT METHOD Mark off the daily closing low on what you are trading, if in a downtrend. That becomes your benchmark. Watch for that level to hold or NOT on a closing basis. BE aware of that level if price moves well away from it, only to see it head fake you and come trading back to close back below it, or hold above it.

You can use this signal to try and see through choppy trading as well.

When we are in relentless chop, if a day that starts off as a sell, turns around at some point and gives us a higher close than the one that acts as our current benchmark, we know we are likely to see the UPTREND continue. When we are in relentless chop, but we seem to have caught a bounce. Then at the end of the day we get selling and miss the close above the one we use as the benchmark, we know the selling is likely to continue, not time to BTD! IF we have an intraday high and a higher close, but then turn around and gap down the next session or open flat and trade down, make sure and be aware of the closing high. We have often seen a day like this play out only to have a buy program come in and take us up to close higher than our benchmark level. IF we see a higher close, we can look for the uptrend to resume. IF we don’t, we can look for continuation of the selling for another day. IF we have an intraday low and a lower close, then come in and gap up the next session or open flat and trade up, make sure and be aware of the closing low. If we see a sell program come in at the end of the day and take us back to make a lower close, even while holding a higher low, it it bearish. Be protective, look for selling to continue the next session. At this point you have probably become confused. Once you have seen this play out a few times, it will become second nature and you will always be on the look out for this. IT all start with marking your chart or making note on your list of levels for where the current closing high and low is. As of this article, the SPX closing high is 2670.71 from Fri 1/18/19. Use that as a benchmark, change it if we make a higher daily close from the next trading day forward (1/22/19). 

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SOC (Scene of Crime)

The SOC is when the market or a stock moves drastically (usually on news or data but sometimes just as a point of failure or breakout) and leaves a level to be revisited again later after the smoke has cleared. It refers to “returning to the scene of the crime” - where something was happening before we were so rudely interrupted! This is an acronym I learned from futures traders as I was coming up in the trading business, coined directly from the colloquialism we use in familiar conversation. Meaning the same thing but in referring to price action or specific level from before the drop of data, news or events on the market. This level can be one we drop in price from as well as one we bounce in price from. Right now as of the date of this blog (10/14/18), we have a very obvious SOC level on $SPX. 2880. This was where the 50-day SMA was flattening out at in the early part of Oct W2. Traders bought and supported that level as a line n the sand (LIS, another trading term coined from regular english language informal conversation) and then some talk from Federal Reserve officials after hours one night scared the market into opening under that level, leaving it up there all alone. The following 2 days saw $SPX drop 170 points from there. Not only was that level the 50-day SMA, but it also acted as an “80-handle Rule” level holding us as support that would inevitable let us work back up to and over 2900 again. Please read the article from the beginning of this blog, written last spring and titled, THE 80-HANDLE RULE, to review or learn more about that.  So as we venture back up off our 2710 low (so far) on $SPX, remember there is a SOC to revisit that may act as a magnet. Also remember, that level will double as a point of RESISTANCE for those don’t want the $SPX running back up over 2900 again yet.

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Acronyms List

These are the ones I use most. I will add to this list if I realize anything is missing or get requests. There are a lot of others out on FinTwit as well, but maybe these will spark your intuition and help to figure out what others are referring to. 

AH - After Hours, usually referring to the trading done in the late afternoon to early evening after the close ATH - All Time High ATCH - All Time Closing High ATM - Meaning 1 of 2: At The Moment ATM - Meaning 2 of 2: At The Money (Option is very near or right on the strike)

BTD - Buy The Dip (sometimes an “F” added in there for extra emphasis) C - Close

E’s - Earnings, as in quarterly earnings reports EMA - Exponential Moving Average - a moving average that places more weight in recent prices that comprise the average. Default point used is the CLOSING PRICE for the time period (daily, weekly, 5-minutes) unless the technician specifies otherwise. 

EOD - End Of Day EOM - End Of Month EOW - End Of Week EOQ - End OF Quarter EPS - Earnings Per Share, aka The Top Line

FED - The Federal Reserve FOMC - The Federal Open Markets Committee - There is a blog post in here about the Fed and FOMC and trading it

GL&GT - Good Luck And Good Trading

H - High HOD - High Of Day HOM - High Of Month HOW - High Of Week HOY - High OF Year HWB - Half-Way Back, aka 50% retracement, aka 50 Fib. The very first post in this blog explains the HWB

IB - Initial Balance - trading range of first hour each day 

ITM - In The Money - price is above the call strike or below the put strike

L - Low LCS - Long Call Spread (BULLISH bet) LIS - Line In Sand, usually referring to the line between long and short  LOD - Low OF Day LOM - Low Of Month LOW - Low OF Week LOY - Low OF Year LPS - Long Put Spread (BEARISH bet) MOC - Market On Close - an imbalance data point published 3:50 each day NFP - Non-Farm Payroll number. Monthly jobs number 1st Fri of the month

O - Open OI - Open Interest ON - Overnight, aka GLOBEX session in futures ONH - Overnight High ONL - Overnight Low OSR - Outside Reversal  OTM - Out Of The Money - price is away from the option strike (below strike on a call, above strike on a put)

QE - Quantitative Easing (Central bank lowers rates or effectively does so in it’s actions) Q1 - 1st Quarter, usually Jan-March but some business use their own calendar Q2 - 2nd Quarter, usually April-June but some business use their own calendar Q3 - 3rd Quarter, usually July-Sept but some business use their own calendar Q4 - 4th Quarter, usually Oct-Dec but some business use their own calendar QT - Quantitative Tightening (Central bank raises rates or effectively does so in it’s actions)

RES - Resistance REV - Revenue, aka The Bottom Line RIP - Reaction In Price

SCS - Short Call Spread (BEARISH bet)

SMA - Simple moving average - a moving average using a single common data point and using it equally weighted (all added together and divided by the number of data points). Default point used is the CLOSING PRICE for the time period (daily, weekly, 5-minutes) unless the technician specifies otherwise. (There is an entire blog article written about SMA, it was around #2 or #3)

SOH - Sit On Hands, aka - do not trade SOC - Scene Of Crime, price BEFORE news or data moved it suddenly  SPS - Short Put Spread (Bullish bet shorting puts) SS - Sold Short or Sell Short SUP - Support

TGT - Target, unless it has a “$” sign before it, then it it the stock symbol for Target Corporation, AKA Target Stores

VOL - Volume

[kiwitrader24]

A Perfect Example of PLAYERS in the SPX Options, Sept W3 2018 (week ending 9/21)

There’s a 3-part article in this blog I always refer people back to reading. It explains about hedging and legging into spreads the way the “Pros” do (or as I like to call them on Twitter, “PLAYERS”). Even if you absolutely only trade straight directionals on $SPX, it is really important to understand and recognize when this manipulation is going on, here’s why:

Helping you to understand why trying to take straight directional belts using expirations on Mon and Wed are a suckers’ bet

Recognizing that price is being trapped and stop your self from averaging down while waiting for the breakout/breakdown that never comes

Stopping yourself from the compulsion of taking far OTM bets or “Lotto” plays without enough time to expiration

Here how the week of SeptW3 2018 traded in terms of the options:

Monday 9/17, a weekly OPEX day. A follow-through sell off from Friday. The HOD on Mon. was just shy of 2905, the close was 2888. This was a great opportunity for those LONG calls at the highly populated strike of 2900 and 2925 to SELL SHORT against them, taking advantage of uncertainly already in the market and playing on those fears. Those with deep enough pockets could be SHORT the Monday expiration 2890’s, those with less depth could be SHORT the 2905’s into the HOD on Monday. The true players probably sold the short during Sept W2 and added in bulk on Monday. Then they go out to $ES and flush it. DOWN the price goes and they win. Tues 9/18 and Wed 9/19 there was a concerted effort to rally the market back, just not high enough to let it close over 2910. In fact, during the day the highs were not allowed more than about 2 points above the 2910 strike. A perfect set up to put their long 2900’s ITM and stabilized. Then short against those long 2925 calls once again, using 2910′s. Wed OPEX goes off without a hitch, closing at 2907’s. Mission accomplished!  Thurs 9/20, the market gapped up open, like magic - on 2919 handle and ran up to a new ATH at 2934.80. Remember that on week 3, those monthly options that stand in the spot for the regular Friday ones will only trade through the EOD Thurs. That would take those 2925 calls PLAYERS have been hedging away at  “In The Money” by almost $10. Calls that would expire on the open Friday for monthly OPEX. So for those who do not want to be bothered by this overnight uncertainty of an opening expiration, getting out of them into that high on Thurs was a great reward. They could take profits and just be long the EOD expiration calls or concentrate on rolling into those expiring Sept W4 for QUARTERLY OPEX. Thursday we were rewarded with a fresh new ALL TIME CLOSING HIGH (ATCH) at the 2930 handle. Fri 9/21, in the premarket we saw a buy program right before the open in $ES. Magic once again! That open was critical to keep high for those who decided to stay long their monthly calls overnight or if they have clients that like to stay long them. They made sure everyone got paid. Another gap up open and new ATH. September settlement was the 2940 handle. A figure 10 points above all time closing high we set the night before on $SPX. That was it though. We drifted down lower for the rest of the day, and had a final hour sell off taking things down to close at the 2929 handle, no new ATCH (All Time Closing High). PLAYERS were already at work hedging for the next week.  Looking to Sept W4 for quarterly OPEX, we can now envision, the sights have been set on the 2950 strike and hedging against that. And if we dip under 2925, PLAYERS are hedging those out too. So in Sept W3, we saw them play 2900 and 2925. And now in Sept W4, let’s see of they are playing 2925 and 2950. Hope this makes sense, please DM me on Twitter with any questions. Please read the longer 3 part article mentioned at the top of this post, it will explain in more detail terms mentioned here. Please remember too, they are hedging the put side as well. We will only go as low as their bets allow us to! GL&GT! 

[kiwitrader24]

Triple and Quad Witching

On Fri 9/21/18 we wrapped up September monthly OPEX for $SPX. 

We also experienced “QUAD WITCHING”.  Here is a simple definition of this, I am cutting pasting this from the daily outlook of an ES trader I subscribe to, just because I wanted to make sure and include all things that expired. This blog entry will give you something to come back to whenever you hear the term “Quad Witching” OR “Triple Witching”:

“The simultaneous expiry of stock index futures, stock index options, stock options and single stock futures. Triple Witching is when there are only 3 expiring, usually inside a quarter. Much of the action surrounding futures and options on quadruple witching days is focused on offsetting, closing or rolling out positions, as well as arbitrage trades, with the result being elevated volume, particularly in the last hour of trading.”  And on the last hour, we certainly saw the market sell off on Fri 9/21! 

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This is an easier to read legend for the SMA’s

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Candle Study #2: Bullish Engulfing Outside Reversal

On Tuesday 9/11/18 we witnessed this particular type of candle on $SPX and several individual names including most of $FAANG. The bullish engulfing outside reversal happens when the market opens down, usually a GAP DOWN open that runs stops and entices in short sellers. The move is stopped suddenly and reversed. The price then comes back to takeout the day’s open, making a new high for the day. Then price continues to move above, rising through the bottom of the previous day’s low. This is where the REVERSAL succeeds or FAILS. IF buying interest is strong enough, price will take out the previous day’s low and continue through into the body of the previous day’s candle. To be truly “Engulfing” the day CLOSES above the previous day’s high.

The body of the BULLISH ENGULFING candle is longer than the previous’s day’s entire range, hence the name “ENGULFING” as it engulfs the entire candle that it sits to the right of.

Here is a snapshot of $SPX 9/11/18 and the days since:

Here is a snapshot of some individual names on 9/11/18:

A reversal doesn’t have to be ENGULFING  to be BULLISH, and sometimes happens over 2 days

Technically, a bullish reversal day just simply has to close above the previous’s day close to give confirmation. Then on the follow-through day, we see a takeout and close above the high of day #1, so a set of 2 candles “Engulfs” that of the first one. 

Whenever a security gaps down, a bullish reversal day is always a possibility. Especially when a security gaps down for no concrete reason, or when an entire market collectively gaps down on a single catalyst (like BREXIT for instance). OR at the end of a prolonged sell off, one last capitulatory move down that finds buyers. Like the Feb 2016 low at $SPX 1810.

A BULLISH ENGULFING REVERSAL usually precipitates a new buying program that lasts several days, creating a new up-leg.

The start of a BULLISH reversal always:

• Starts BEARISH, ends BULLISH

• The takeout of the previous day’s low, or a gap down below it. Then a reversal moves price back above it

• Then the take-back of the bottom of the body of the previous day’s candle, rising into the range of previous day’s candle body. Using 50% (the HWB) of the previous day’s range is an excellent indicator of follow through. 

• The reversal becomes an ENGULFING one when the day CLOSES above the previous day’s high

• To be truly an ENGULFING day, the present candle body top to bottom, is longer than the previous day’s entire candle from high to low  

Engulfing outside reversals when they are BEARISH

You can witness this in the exact same way, just in reverse. When a market or security gaps open up over the previous day, but weakens at some point and begins to come back down. If the selling becomes too aggressive and doesn’t find buyers to build a “FLAT” (a sideways set of intraday candles showing support at common price area), it can wind up filling the gap right away. In filling the gap right away, it often sets off stops that exacerbate the move right back down into the previous day’s range. 

This is the reason we do not like to see gap-ups fill quickly when we are bullish. Because the danger is VERY HIGH that it snowballs into an engulfing BEARISH reversal.

Although, the bearish reversal tends to lean more often towards a 2-day event like the one described above. First a warning day with a small bearish “inside day” candle. Then a 2nd day when the reversal completes itself by selling off through the whole range of candle #1 and closing below its low.  I will go over BEARISH reversals in more detail with the next installment. Since we just had a text book case of the bullish engulfing day, not just on $SPX but on many individual names as well, I thought this was a great time to strike while the iron was hot! 

[kiwitrader24]

Candles: A Quick & Easy Guide Starts Here

A candle on a daily timeframe chart, if you understand how to read them, will tell you the general sentiment of a day and exactly how people behaved. Remember that each candle represents how the ONE PERIOD of the time frame you are looking at started and ended, plus how high or low it went. Variances between the high and the close, the low and the close can be very telling about people’s behavior and their willingness to commit or their fear of missing out (FOMO).

Basic Candle 101:

Each Candle on The Chart Represents 1 Period of The Timeframe The Chart is Set to

Daily time frame, each candle represents  day

Weekly time frame, each candle represents a week Hourly time frame, each candle represents an hour. Etc…

The BODY Represents The Open and Close of That Period If the candle is GREEN, it closed HIGHER than it opened

If the candle is RED, it closed LOWER than it opened

What The Tails Tell Us The tails represent the high and the low of that period A very long tail off the top represents sellers and a desire to GET OUT

A very long tail off the bottom represents buyers and the desire to GET IN

A candle with equally long tails and a small body in the center, represents INDECISION or LACK OF COMMITMENT

Reading Candles

There is a very respected school of thought on reading candles and using certain names for them such as Doji, Gravestone, Spinning Top, Hammer, Dragon Fly. In my opinion, I try and remember the fact that people and their actions in trading throughout the day create the shape of the candle. They do not just print themselves. Rather than memorize a pattern, I try and read into the behavior by looking at how the candle began and ended and how high or low it went and if there was a notable distance between the CLOSE and the high or low. I try to look at the shape of the candle, and over time I have come to understand whether a day was good or bad by looking just at that shape, color and it’s position compared to the one printed right before it.

USING A DAILY TIME FRAME, let’s look at a BULLISH HAMMER REVERSAL

This is when the day starts out neutral or negative, and price begins to drop well away from where it was at the open. It descends rapidly, often towards a fixed point like an SMA, a gap or an old low set a few days ago.

Suddenly price stops falling and buyers step in. Buying continues and accelerates, maybe because that key level was reached and now people want in, creating FOMO. Or maybe there is a relationship to the previous day’s levels showing me something. 

Buying continues as shorts begin getting forced to buy and cover. Then price accelerates more when it passes the opening price and the candle turns GREEN. 

The price stabilizes and rises further as buyers COMMIT to staying in the security and the day closes higher than the open, often not far off the HOD (high of day) and sometimes right on it, leaving no tail or very little. The candle shape resembles that of a hammer. 

The color of the candle is green because it closed the day higher than where it started.

We are left with a long buying tail on the candle representing the “handle” of the hammer. 

What This BULLISH HAMMER Tells Me

A sell program kicked in after the open. We sold off down under the previous day’s low and through the SMA. Then buyers came in, and we rallied taking back the previous day’s low, then back past where we started out and closed strong. I look at this candle compared to the one printed before it. There was probably a lot of weak players shaken out as that is why we started falling so fast and the evidence is this long tail left on the BOTTOM of the candle. The close was strong and not far off the HOD. This is a positive and now tomorrow I need to see this open and closing area hold to show me there was commitment and not just a short squeeze or weak hands being shaken out. IF this drops again down under the body on the next candle, it might be telling me that there was NOT commitment and that this was a SET UP for a fund or a large holder to distribute shares that they are trying to get rid of. So I have the evidence of how people behaved and a reference for myself to use in the next period. As we go through the next few weeks, I’ll add more candle types and how they explain the behavior of the market on that particular day. In the meantime, you can take this explanation and look for it in things you are trading. The candle shape can be a little different but you have a general idea now of how to read it. You can also turn it around to explain the exact opposite type of a day, with a BEARISH REVERSAL hammer, an upside down and RED version of what I just explained. I’ll let this one sink in a while and explain that one further next time. Hope this is a helpful start! 

[kiwitrader24]

The Fed Meeting We Trade Around - A Quick Guide

The Fed is short for The Federal Reserve System, consisting of the Board of Governors and the 12 Federal Reserve Banks

What we trade around are the 8 scheduled meetings of the Federal Open Market Committee (FOMC),  which is the policy making branch of the Federal Reserve system. The FOMC consists of 7 governors, one of which is the Chairperson and another is the Vice Chairperson. You will hear this committee & meeting referred to in the media and on Twitter as The Fed, The Fed Meeting and the FOMC.

Here is a great link to a more detailed, but easy to understand & quick read explaining he history of the Fed, it’s makeup and it’s duties:

https://www.investopedia.com/university/thefed/fed1.asp

What matters to us as traders during the FOMC:

The FOMC meets 8 times per year, but can meet at anytime necessary to address issues in the system. That means, the Fed can meet anytime with no warning and raise or lower interest rates or adjust policy. But for the most part, we anticipate these 8 regularly scheduled meetings.

In the 13 years I have been trading on a full-time basis (an investor for 27 years, but trading full-time is different from investing) only in an emergency like we witnessed in 2008 or if there is a small and inconsequential piece of business to address, have I ever seen the Fed meet other than on the regularly scheduled dates. The Fed has become so transparent, it is virtually impossible for them to surprise markets, the way Paul Volker did in the 1970′s. 

Of the 8 meetings that are regularly scheduled, 4 are followed by a press conference given by the Fed Chairperson (right now that is Jerome Powell).

Fed meetings are always scheduled over 2 days, with the 2nd day concluding on a Wed and the Fed Statement on policy is released at 2:00 p.m. ET. Very rarely does this schedule ever change, one time in 13 years have I seen this schedule change. In December of 2017,  the Fed meeting chaired by Janet Yellen, was on Wed-Thurs with statement released on Thurs 12.14.17.

The Fed Statement accompanies the Fed Decision on interest rates (whether they raise, lower or make no change). The statement is what moves markets more so than the decision which is anticipated by the market and rarely a surprise. The statement is scrutinized and scoured for nuance in language and the market trades based on what it perceives as positive or negative messages it gleans from the language in the statement. A trader should always know when the regularly scheduled Fed meeting is and should anticipate how it may affect their positions. Many professionals on Twitter claim they take the day off. I bet they also claim to never slow down on the highway to look at an accident either. IF you “take the day off,” that means you are FLAT or hold no risk of consequence that can damage your trading base. 

Here is a link to the schedule of the meetings and the ones with a press conference are followed by an asterisk:

https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm

The Fed minutes are released 3 weeks from the date of the statement, also on a Wed. at 2:00 p.m. ET. 

The Fed minutes gives the market a look inside the meeting for more details to who votes which way, if they are leaning towards changing language, and if members are working with a unified opinion on policy. Even though in the statement we are informed of who voted which way, this gives the market greater details. That is why days the Fed Minutes are to be released can often be as volatile as the day of the statement. These are not necessarily  days to take off, but see the comments below for tips on how to prepared for them.

What I like to do as a trader going into the Fed/FOMC/Minutes:

Since I trade mostly SPX I refer to that here. But if you trade another index or individual names that often move on the Fed (like banks and homebuilders), the same things apply…

Look at the way SPX traded during the last meeting, note actual levels the index was traded at, sometimes they revisit

Look at how many points in total SPX moved on the day of the last statement and anticipate a similar move for the upcoming one 

Look back to where the SPX was trading when the statement came out, and use that to compare on the days the minutes are released

Anticipate if levels the market traded on the day of the statement will be traded again on the day of the minutes Mark your calendar and set a reminder mid-week before the STATEMENT and the MINUTES to anticipate the calls or puts you buy for the following week’s expiration 

Fed Drift

This is a phenomenon where the market drifts higher on the 1st day of the meeting (Tues) as the market anticipates the decision and statement. There can be many explanations for this. The easiest one, is that shorts simple cover ahead of the event. A more sinister explanation is distribution by Funds that are off loading excess supply by driving up the market by way of the Futures and tricking people into FOMO along with forcing shorts to cover. Then they take the high and juicy short entry to play after the release of the statement. Whatever the explanation, watch for Fed Drift on Tues ahead of the Wed release  of the Fed (or FOMC) statement. There is not usually Fed Drift ahead of the minutes, but it never hurts to be prepared. Here’s hoping this gave you some actionable ideas to help be prepared for what the market does around the time of the FOMC.

[kiwitrader24]

How to Leg-into a Spread and Build an Iron Condor like the Funds Do  PART 3

Each week we start off trading with all the optimism that the SPX will move out of the range it’s in - ONE WAY OR THE OTHER. And when it doesn’t, we need a way to make money off the lack of movement. We need to FOLLOW WHAT THE PLAYERS do. 

I use the term “Legging Into A Spread” often. 

This means buying the long put or call option and then selling a strike against it when price moves towards your strike, but not enough to move PAST it. PLAYERS (my personal name for Funds and Fund Managers), will use the Monday and Wednesday expirations to short their long Friday strikes. And if price has still not moved enough by the EOD (End of Day) Wed, they will roll their short strikes to Fri.  

One point aside from lack of movement that I am trying to make, is that I see evidence that buying the Mon and Wed expirations and sitting on them usually ends up being a trap to steal your money. I try and only buy the Mon and Wed expirations if I plan to close them the same day I buy them. IF I can’t, then I will HEDGE them to protect myself - by legging into a spread. But even if I stick to my rule and only buy the Friday expirations, I need a way to absorb the time decay suffered when price gets trapped in a range. 

SCS = Short Call Spread 

A BEARISH BET that price will not RISE past the lower of your 2 call strikes

To hedge when you see price coming up to resistance you sell the LOWER STRIKE call strike against your long call and create a short spread, such as 2745 short call (sold to open) against your long 2750 call.

A recent example of when this would have been useful were the 2 times in the last 2 weeks we saw SPX travel right to 2742 and FAIL.

Hypothetically, you would have bought the 2745 or 2750 call down when SPX was at 2725-2735. You chose this strike with the target in mind of 2752-58 because it has been analyzed and discussed at great length by way of the recaps and the ROADMAP.

Then as SPX got to 2742 and you sense that sell program coming in on ES, YOU SELL SHORT (sell to open) a lower strike against your long one. So you would SELL TO OPEN a 2740 or 2745 call making a SHORT CALL SPREAD.

On the other side of the spectrum, we do the opposite…

SPS = Short Put Spread 

A BULLISH BET that price will not FALL past the higher of your 2 put strikes

To hedge when you see price coming down to support, you sell the HIGHER STRIKE put against your long put and create a short put spread, such as 2705 short put (sold to open) against your long 2700 put.

Again, a recent example of when this would have been useful were the 2 times in the last 2 weeks we saw SPX travel towards 2700 and then get snapped back by buyers. Through looking at the ROADMAP, you see that the 100-day SMA has been a spot that has been bought on nearly every approach.Yet if it breaks, we cold fall well below 2700.  When we were up there at 2742 and failing, you bought some 2700 puts but you know that if they are going to step in AGAIN at the 100-day and buy, have that order ready to SELL SHORT a 2705 or even a 2710 put against this long 2700 one you have. 

On puts it has been especially lucrative because the premium really increases when we get hit with a sell program as it is usually turns out to have been instigated by news. Taking advantage of this bump up in premium makes selling short put spreads in this manner very attractive.  

The IRON CONDOR, Holy Grail of Option Selling

When you have both the short call spread and the short put spread, you have an IRON CONDOR. You’ll see that your buying power goes back up again because one short spread cancels the other one out as long as you are in them both. Then you just wait for the PLAYERS to trap price in a cage. Using the range we saw the last 2 weeks, that would be under 2740 and above 2705-2710. 

There is also a more passive way to hedge…

IF I am in a strike that sits somewhere more in the middle of the range I think we are in for the week, or if I think one side is finally going to BREAK, I will sell a strike BEHIND the put or call I am in to make a LONG SPREAD. I will do this just to hedge against time decay and peace of mind when I want to hold an option overnight. Performed in the exact same way, wait for price to come to the “edge” or as close to your long strike as you think it will get as explained above, but sell the HIGER call strike or LOWER put strike. 

Using the exact same scenario as above, you would then be in the 

2745/50 or 2750/55 long call spread  2700/2795 long put spread

I hope this makes sense, if not it is a great idea to PRACTICE DOING THIS IN A PAPER ACCOUNT. Legging into the spread gives you the best possible credit - $2 or more per $5 of spread, and is the way these PLAYERS do it. IF you are in a situation where you cannot leg into a spread because your particular account set up doesn’t allow you to do this in 2 legs, then wait for price to come right to where you think the edge is and SELL A SPREAD. If you are doing this right and getting the edge, you should get 1.50-2.00 optimally for a $5 spread. IF you sell it slightly into the money, you may get more than $2 - but that becomes a much riskier bet. When you LEG INTO the spread, you do that to get $2 or more.

In closing, it is important to add that to maximize your profits in spreads whether you leg in, or sell them in one transaction, is to take advantage of COVERING the short strike on the dips or rips and ride the long strike to profitability. RE-SELL AGAIN if you run into a wall in price. When you get to do that you are playing the exact same game as the PLAYERS.

THEN you are a PLAYER too.

[kiwitrader24]

Hedging with Options and Following What Funds Do -  PART 2

Well, there you have it. MayW3 and MayW4, 2018 are in the books and they traded in virtual lockstep.

Funds, or as I like to call them, PLAYERS, leg their way into short call spreads (SCS) and short put spreads (SPS). When WE do this, we “hope” price stays in the range we have analyzed and mapped out. PLAYERS “trap” price in a specific range by placing large orders in $ES (S&P futures) and guarantee their bets. Let’s take a look at an example of this behavior

May W3 2018 - Monthly OPEX:

Going into Monday 5/14 we are on the heels of a rally that has taken us from 2594 to 2732.  SPX gaps up open, with price rallying 10 more points to 2742 in the first 30 minutes. Then a sell program hits. A sudden and unexpected sell order hits ES and the first long red candle seen in days prints. 

Maybe there was just not enough breadth. Maybe a dealer, overly taxed by the 148 points straight up in SPX, threw a rock into the spokes of the wheel. There may even just be a time where a formula is reached, premium maximizes and a bubble just pops. That part is fine, that is what makes a market! This sell program lasts the whole morning, and price stabilizes finally at 1:00.

On Tues 5/15, SPX gaps down open and a new sell program starts, more likely fueled by less risk tolerant people from the day before. Again, that’s what makes a market! Price continues falling all morning and finally stabilizing out at 2:00 with a low at 2701.90

We now have established A 40 point range in 2 days. But note that it has been establish in between 2 of the most highly populated strikes and the most popular choice of expiration:

The May Monthly (W3) exp. SPX 2750 call. The May Monthly (W3) exp. SPX 2700 put.

Stepping back at this point, the trade has taken place as follows: The high at 2742 offered an opportunity to short 2745, or even juicier 2740  calls short.

The low at 2701.9 offered an opportunity to sell the 2705 puts short. 

PLAYERS love to let SPX get $2-3  ITM (In the Money) on the strike they choose to short, that way they get the maximum credit. I like to do that too, although there have been a few times I’ve gotten burned badly doing it.

That’s where it starts to become less like a market and more like a fixed bet. Once upon a time, you would see a rally in a sector come to the rescue and stop SPX from falling any further. Now, we see stocks very high in market cap and way up there on the SPX, rally or sell off in a group, but SPX just sits in a range. IT sits in a range because there are many different ways to control it now, working around the clock as well as multiple expirations going on almost daily that make it very lucrative for price to move in precise time and range to cash in on the expirations. 

Many people don’t accept this theory, often because they are not option traders. Options are more about time decay than anything else. Therefore the timing of the moves on the SPX is now more important than how far of a range it moves. It used to be that you bought options for timing around earnings or an event. Now it is simply a crap shoot at the hands of those who have the means and the motivation to virtually stop time.

IT is very important to get behind these moves and not in front of them. I for one am guilty of freezing up when it’s time to make the decision to short a call or a put. I froze on Monday 5/14. I swear to you I even sent the order through a few times and when it did not fill within a few seconds I pulled it. But that sell program got away from me and by the time I got my short calls, they were just making me whole again and not offering much of any credit at all. But with SPX, this is what you have to do OR take a loss. Because your OTM (Out OF The Money) strike is not going to come to fruition. 

We saw this exact trade play out a 2nd week in a row May W4

Unless you had a crystal ball, you were probably assuming we had topped out at 2742 for the time being. Analysis showed us there were targets to take out at 2739 and 2744 and this level stopped right in between. And we were going to retrace lower than the 2701 we had stopped at the previous week, because there were gaps left down there plus many of the SMA’s are all still down there as well. 

On Mon 5/21 we gapped up open on news regarding China from over the weekend. But we only got so far.

On Tues. 5/22 we gapped open again - and  just like last week, we hit the exact same price at 2742, plus a few pennies more for a head fake higher-high. Looked like we were going on to our next targets and those 2750 calls would pay off. Then WHAM! That sell order hits ES and down we go. Again.

On Wed 5/23 we gap down some more but rally back, I mean way back, by the end of the day but WHAM! A sell order hits ES as we get to 2737.75 and we close lower.

On Thur 5/24 we open not far off the previous close but sell off further on news about North Korea and melt down to a low of 2707.

On Fri 5/25  in the overnight session we rally back up to that 2737.75 ES but rollover and sell off by the morning open. Then over the course of the day Fri we sell off to a low of 2714.99.

Again, the Friday Expiration 2750 calls and 2700 puts and the exact same play is made in shorting against them. Only this week is more brazen and choppy because it is not the week of monthly OPEX. I often think of W4 as the week the boss gives the keys to the kids and lets them have their fun running people over. That W3 expiration is the “High Class” very buttoned up event, and W4 is just for fun almost as if it doesn’t count. W4 this month was a replica of W3 but with more twists and turns and more rug pulls. 

Ok, enough with the ortopsey of what happend. I’ll publish Part 3 on Monday night which will lay out the steps to trade this. Unless I’m too sunburned.

Enjoy the Memorial Day holiday all! 

[kiwitrader24]

Hedging with Options and Following What Funds Do

Funds and Institutional investors will usually only buy calls and puts at the Friday and/or monthly expirations and then will use the Mon and Wed expirations on SPX to hedge against these. 

I talk a lot about how the OI (Open Interest) is usually highest at strike points ending in increments of 25, like 2600, 2625, 2650, 2675, 2700, etc… When you check volume and OI you almost always see it highest at these strikes. And you will see it especially high on Friday expirations and the monthly expiration (Fri W3 a.m. expiration). That’s the work of funds and institutional investors. Just the Friday expiration, and just the 00, 25, 50, 75 ending strikes.

Funds and institutions buy Friday and monthly expirations, being long both puts and calls there, then they will sell strikes against them to hedge their risk if there is not enough energy in the market to move past/below their long strikes. 

Here is a link to a chart I posted on Twitter today, 5/20/18  in @kiwi24carolyn, drawing out what has happened so far in May with SPX and trying to explain the activities:

https://screencast.com/t/9FYo9bttOuCO

A short history of SPX options

There used to be only Friday expirations on SPX. A stalling out in price used to come into play by about Thurs afternoon, and then you would have the phenomenon of every Fri being low volume and no ability to get past a certain level on $SPX - pinning a particular strike. The primary leaders of the index would be stalling out in price and pinning would take place across the whole market. The index operated as it should - as a composite of 500 stocks. ES or VIX was your only way to trade sudden volatility or hedge against it. 

Then in late 2015, options for SPX expiring on Wed were introduced into the market followed in early 2016 by Mon expiration. By mid 2016 there were expirations on 3 days a week and sometimes 4 (if a week contains the very last trading day of the month/quarter and doesn’t fall on M, W, Fr, it will be a 4th expiration day!) These added expirations gave you the ability to customize your risk closely around earnings and events for the market. No longer did you need to trade futures in order to hedge. Futures require a large amount of cash deposited into a margin account to trade a single contract. And VIX which had been “throw away money” you knew had a 90% chance of losing, was no longer your only “cheap” and passive way to hedge. 

In 2017 SPX moved in a steady straight line up throughout the whole year. Each week trading only a small range and going for weeks on end within a small range. By this point, funds developed strategies and wrote programs to exploit the additional expiration for SPX. Shorting these added expirations  also exploited the lower price entries they offered to retail longs because a large fund can then go to futures and trap price to ensure the outcome of their bets. 

2017 became the year of no volatility and the year to short VIX  Shorting VIX was likely a byproduct of too much control available in SPX. ETF’s to short VIX and entire funds in the style of a mutual fund were offered to retail dedicated to shorting VIX. In 2018 volatility returned as the SPX topped out in price.  Those funds dedicated to shorting VIX blew up overnight as did certain short VIX ETF’s. 

Now we trade between a mix of volatility followed by sudden stops out of nowhere where price on SPX stands still in a 25 point range for days. Sometimes a single week can be split between one  huge trade for Monday-Wed and a mind numbing move nowhere for Thur-Fri. A nod back to the days before 2015. Sometimes it is vice versa, nothing for Mon-Tues and then a violent rally or sell off Wed-Fri. We saw this behavior in March 2018 where every Wed afternoon through Friday into the close was a virtual blood bath. 

Legging into a spread 

When I anticipate this stall in price, I try and leg into a spread the way I believe funds are doing. That is, I will stick to buying the Friday expiration OTM (out of the money) call or put and sell against it as price gets toward my target but stalls out. I’ll do this to recoup my cost or make an overall profit above what I paid in the first place. 

In the next blog post, I’ll go over that procedure in detail. That will be part 2 and I will post  it one night this week, in lieu of a post for next weekend which is a long holiday for Memorial Day. I hope the chart I included in this post gives you something to digest and see, how funds exploited price in the SPX so far this month (May w1-W3) to their advantage in spreads. And how they legged into spreads themselves. 

[kiwitrader24]

The Unique Expiration SPX Week 3 Monthly Options

The first Friday of each month marks week 1 for options, even if the week starts off with days of the previous month. What we refer to as the last week of the month, options refer to as the first week of the month, when it contains the first Friday in it. 

The week of each month that contains the 3rd Friday is considered MONTHLY OPEX for all options. 

Even if it is nowhere near the end of the month yet. And in the case of SPX options, there is a yet another unique way that particular expiration gets traded.

Week 3 Friday options for SPX expire “European Style” like the way VIX options do. That is, with the averaged OPENING print rather than the final close at the end of the day. 

So when choosing your Friday expiration in SPX for week 3, you will see 2 sets of options expiring that same day. 

One is the traditional standard W3 Friday options that expire with the averaged open. The other is an option that expires at the end of the day (EOD) like the rest of the options in the market do.

Traditionally, the a.m W3 expiration is the go to choice, the product most populated by larger traders and by fund managers who only go long monthly expiration in anything (and use all the other expirations as a hedge against this postion).

SPX monthly a.m. expiration options are the gold standard for  hedging portfolios

SPX monthly a.m. expiration options have the most volume and therefore will be the most liquid. This is why it is often better to choose this expiration over the EOD one. Look at the Vol and OI and compare, you will see it.

The afternoon expiration SPX W3 option was once it’s own separate product with a unique ticker. In the 4th quarter of 2017 the EOD Friday options were folded in with all the others into 1 family under the ticker SPX.

SPX monthly a.m. expiration options only trade through the Thursday close

You will notice that on that Friday there is a choice of 2 expirations for the same day, and one has a day less to trade than the other one. This is why

SPX monthly a.m. expiration options expire with the averaged opening print using the ticker $SET 

in Think or Swim, this is the ticker and it includes the dollar sign.

It takes about 15-30 mins after the open to get the averaged opening print, it is NOT the print you see on the daily chart for SPX

It takes about 45-60 minutes from the open for those options to be settled and the cash in your account to be available to trade with if you have not closed them by the bell on Thursday 

There is a risk that the market will move drastically and change overnight between the close on Thurs and the open on Friday which can affect what your Friday W3 options settle for. This is particularly risky when you are holding SHORT SPREADS that are very close to being in the money (ITM).

Often we see a Friday W3 SPX open sit relatively sideways because it is waiting on this settlement. This sideways action can destroy a lot of the premium you have paid for in the EOD options, which is another reason not to take those over the a.m. expiration. IF you want to use those, buy them after the open or just go out to the next week for more time.

Once that cash is universally settled, sometimes we see a move in the market as funds look to facilitate an entry in new options. 

Sometimes we see the market come back to the original place it settled in the a.m., by the EOD. My only explanations for this is maybe a larger trader decides they want/need a clean exit on the month without having to explain to their boss how they settled at a gain in the a.m. and a loss in the p.m. or vice versa.

3 other things to know about SPX Options:

There is also an End Of Month expiration for SPX (EOM) on the final day of a month. Do not confuse these with the language of “Monthlies” because remember, every 3rd Friday for all options, are called Monthlies.

EOM options are re-named Quarterlies on the last days of the month that end a quarter: March June, September, December.

If the last day of the month or quarter is on a Tues or a Thurs, that means you will have 4 OPEX days in a single week 

It is surprising how many people trade SPX options and do not realize this unique situation for Fridays. If there was 1 thing people like Bob Pisani and Art Cashin should communicate to the audience, it is this. But for some reason it seems like nobody wants the retail market to be educated on this. It is as if you have to learn about it by accident. Or by someone who Tweets about it around the middle of Week 2 every single month for the last 4 years. Like me. LOL! SPX options seem like they are some kind of private club with a secret handshake you have to learn by accident, over the course of time, while living on a private island, without internet access. I may change my twitter profile to say that. 

If you ever forget about how $SPX Fri. W3 options work, just come back here and read this blog post! GL&GT! 

[kiwitrader24]

The SMA’s & What to Know

SMA is the acronym for Simple Moving Average and it is set by default using closing prices.

Some analyze using old school average lengths like, 9, 18, 21.

I always use the ones in plain english, that I know the greatest number of other traders use:

10-day

20-day

50-day

100-day

200-day

Here is a screenshot of the SPX with all the SMA’s noted above on it, plus a common sense explanation of their time frame. Remember that a trading week has only 5 days in it, so these references of time take that into account. 

One note, which I know most people reading this already know but it is important to reiterate…

A XX-Day SMA is only that on a chart set to DAILY TIME FRAME. 

On a chart set to another timeframe, the line becomes an XX-PERIOD SMA. 

For example, on a 5-min chart the 50-SMA line is 50 PERIODS of 5 mins.

SMA’s are the one truth we have in trading. They are not subjective, they are a printed receipt. 

When you hear a talking head in the financial media brushing these off as technicals and not something they concern themselves with, they are literally brushing off truth in price and the reality of what’s happened. Usually because they cannot articulate to the camera what an SMA represents. OR they know exactly what it means, but it disagrees with the position they are trying to push to the audience.

No matter what security you trade and from what country you trade it. We all see the exact same average closing price.

The line is a graphic representation of how the security has behaved in terms of price over a given time period. They show us whether price has been rising, flattening or falling, and they show us when price in one time frame will rise or fall below another (Bull and Bear crosses)

So the SMA is the one common thread that ties us all together as traders. 

We have seen closes manipulated plenty of times on plenty of things. But when you string together a set of them at 10 or more, it becomes less manipulative. That is why we often hear: 

10-day SMA is for day traders

20-day if for hedge funds

50-day is for mutual funds 

200-day if for the whole market as institutions managing a pension fund, group of funds or a large amount of different stocks pay close attention here. 

Direction and Crosses of the SMA’s

Since we all see the SMA’s together as a world of traders, it is also important to see the GRAPHIC REPRESENTATION of them. The direction they are traveling, the trajectory (speed) they are traveling, if they are crossing paths and anticipate when they might cross paths. Programs are watching this and anticipating as this can help time entries and exits. ALGORITHMIC programs, PATTERN indicators and TIMING CYCLES, feed on this information, using them for where they expect a reaction in price (RIP).

The BEAR CROSS

When the shorter time frame SMA crosses down through the longer one. 

That means the shorter time frame price has seen so much selling that it is now a lower price than that built over the longer time frame. This security is LOSING VALUE. This is most commonly treated as a SELL SIGNAL.

Factors to consider are if both the lines are falling and is this happening after an already very long period of selling, thereby creating a situation of OVERSOLD CONDITIONS. This is where program trading gets involved and sometimes turns the tables, creating a RIP and buying the security instead.

A RECENT EXAMPLE OF A BEAR CROSS 

We saw a classic example of this on SPX Thurs and Fri 5/3-5/4/2018. On Thurs 5/3, the 10-day SMA crossed down through the 20-day and the market opened and sold off all the way down to the 200-day SMA, even breaking below it. But this particular crossing was the 2nd time around in the last 3 months (1 Quarter). Programs turned the tables and used this opportunity to treat the SPX as OVERSOLD and price snapped back. The following day Fri 5/4, we dipped one more time, testing and directly holding the 200-day SMA, and rallied to CLOSE BACK ABOVE the 10/20 DAY SMA’s. This was critically necessary to confirm the OVERSOLD BOUNCE. Had we not closed back above the 10 and 20- day SMA’s, attitude coming into Monday would have been slanted to the sell side. Knowing this was critical, helped me to target 2660 as the first place to look at taking profits on the day. That was where the higher of the 2 SMA’s was going to be at. And I knew if that was going to hold, more buyers would come in. 

The DEATH CROSS

When a longer term SMA crosses down through and even longer one, it shows an unhealthy state where value is declining rapidly to the point of failure. Usually we look to the classic combination of the 50-day and the 200-day. When the 50-day (about 1 quarter in time frame) crosses below the 200-day (about 1 year in timeframe) that states that the value of this quarter is now less than the value was a year ago. We have to check that BOTH LINES are falling, that gives us confirmation. When this type of cross is going on, we see institutions leave the stock and it is usually attached to something major, another shoe to drop. 

UNLESS this event is treated as OVERSOLD, where an institution steps in and publicly announces their support and that they have bought the stock. In my world, you never buy a stock for the long haul when it is in a death cross until you have the support of an institution. IF you are VERY good at your homework and can sense someone is about to step in, then go for it. Otherwise, look for something else to buy. There’s plenty of stuff out there and nobody needs to be a hero! 

The BULL CROSS

When the shorter time frame crosses up through the longer one. Translated, that is putting things back in natural order and that momentum is back in the security. Price of the last 2 weeks should be higher than that of the last month, quarter and year on a security that is steadily gaining in value. After a prolonged period of selling, if the 10-day SMA flattens then begins to change direction up, it begins to cross up through the other SMA’s. This is most commonly treated as a BUY SIGNAL. 

Now that we have seen a BEAR CROSS on SPX as explained above, we look for momentum to continue and the 10-day turns and crosses back up through the other SMA’s. We need to take note if the other SMA’s have flattened and are changing direction. IF all the SMA’s are on a trajectory higher and the shorter time frames begin to rise above the longer ones, the security is GAINING IN VALUE.

The GOLDEN CROSS

Is the opposite of the death cross. When price recovers and the 50-day moves back above the 200-day. It is important to note that BOTH THE LINES must be rising. If the 50-day is simply rising over a falling 200-day, there is concern of the quality of that move,it might only be short covering. One should be cautious until that 200-day SMA flattens and begins to GAIN IN VALUE. 

When The Signals Fail

That is what made the selling at week 3 of April (monthly OPEX) 2018 so diabolical. Because all of the SMA’s had finally unified and began rising together. The selling that started the day after the April high, was the beginning of a group think that we are not ready to recover, that we had better take what we’ve got and run with it. OR, there was a “Large Better” who needed to short the market and the group think eventually glommed on to the idea we heard, “This is as good as it is going to get.” IF buying had been allowed to continue in those bullish conditions in price at the April high, there would be NO turning back to the short thesis for some time. 

So now we saw a diversion on Thurs and Fri 5/4/18 from this negative group think, with the assurance that an American institutional player, Berkshire Hathaway (Warren Buffet) had stepped in and bought the lows on a stock like AAPL. We had a monument similar to that of the Dimon Bottom in Feb 2016 at SPX 1810. Follow through is key and we look to the SMA’s to flatten, rise and cross up again. 

If someone steps in front of this again as a seller, then that is a whole other blog post! 

As always, GL&GT! 

[kiwitrader24]

The 80-handle Rule

When security prices reach a number that ends in 80, they always move on to 100, or fail there and retest where they came from. Usually a number ending in 65-60.

There is psychology and an old trick left over from pit trading and the floor of the exchanges. 

From before computers and charting platforms. From before weekly options or frankly, options period. And before most stock prices really even went above 100.

On the fly, traders would accelerate their buying once a price was shouted out at 80, and would stay in there until it reached 100, then reassess and look at the fundamentals.

IF price failed between 80 and 85, they would pull their interest, until it falls back to 65-60. Then they will buy it again, remembering price came from 80. 

IF price failed 60, they pull interest again and look for 50. 

Once under 50, it was a wild west show as every individual trader and situation defines that area. They would again reassess and look at fundamentals.

Now with computers, weekly options and stock prices in the 100′s and 1000′s, this rule works at 800 and prices ending in 800 (as well as the old standby of 80).  Like when you saw GOOGL, AMZN and PCLN go to 800. And 4 digit prices ending in 80, like 1180, 1280, etc..

Now that prices often rise above 100, what next?

Once above 100, 100-150 is that free-for-all area just like 0-50. You will often see a stock wallow in price for several weeks or months between 100 and 150. But once it makes it to 160-165, the 80-handle rule kicks in again. But we often see price get stuck 160-65 waiting for a catalyst to take it 180.  Just look at AAPL and FB in years past and recently. How long did they spend between 140-150 before breaking up to 160-65? And the recent failure of FB took it down to 159, just a hair below 160, and bouced back above to hold between 160-165. Look at AAPL in the past week! 160-165 heavily churned. 

So if you have a security (as in anything you want to trade like stock, ETF, commodity or index, futures, bitcoin), use the 80-handle rule to confirm your entry:

Use it as an active trader when you don’t have access to your chart. IF price is ending in 80, you may want to try it long looking for resitance at 85. If price is at 85 and struggling, you may want to wait for a pullback to test closer to 80.

Use it to help you remember where the SMA’s are, like when you know the 50-day SMA on AAPL is at 160, and price right now is 170, you might do well to go ahead and wait for a test of 160-65 to get long. You know that that the 50-day is right near that 160 inflection point that can take you back to 180. Use it to help pick option stikes. If you know price is here at 160 and a catalyst is just ahead (like earnings, shareholder meeting, data announcement) that will take it either to 180 or back to 150, look at 180 or 185 calls and 150 puts and see if this better fits your budget and strategy. Maybe you are convinced of 180, but buy a half or quarter size position of 150 puts as a hedge just in case. 

In short hand:

80 to 100

Fail 80-85, back to 60-65

Hold 60-65, back to 80

Fail 60-65, back to 50.

Under 50, sit on hands or use other methods of determination.

Getting into the weeds about this rule,  how it came to be:

Again, this is old timer stuff that is left over from days gone by but still in behavior. And ALGOS pick up on behavior and code around that. 

“Back in the day”, when a stock made it almost to 100 and failed, some traders would pull interest and stand a hard line that they will not re-enter until a 50% pull back. Until price was cut in half, $50.  But if the stock got down to 60-65 and it looked like buyers were picking it up, they would bend their rule. OR, if price got down to $50, some decided they wanted confirmation by way of a $10 pick up in price to confirm there was conviction. Wait for $60. 

IF a stock made it over 100 but failed at 150, they want it cut in half again - $75. But if buyers were picking it up at 80-85, they would bend their rule and go for it. Or if it made all the way to half off (75) they wanted to see conviction and confirmation by way of waiting for 80-85.

Still another school of thought is that when the price hit 75, they were not going to be convinced it was ready until buyers took that back up to 80. And the ultimate unicorn is for that price to hit 80, fail and tumbke all the way back to 60. Their mind says, “Then I get a great deal, more than cut in half, I get 60% off of that original 150. This is more than beat up now, I’m ready.” You know that 61.8 Fib is everyone’s favorite right? Because it is, “A little more than half off.” That’s a whole other blog post. 

In shorthand, AGAIN:

Wait for 160-65, then pause for 150 on a fail. 

And under 150, a full test of 100 is highly possible.

Under 100, wait for 80. RINSE REPEAT. 

GL&GT! 

[kiwitrader24]

The HWB

HWB stands for HalfWay Back. As in 50% retracement, 50 Fib, The average between price A, and price B. The HWB is more of an art than a technical, because it requires picking the right 2 levels to average between. These 2 levels can be the high and low of the day (HOD/LOD) or the high and low of the year (HOY/LOY). They can be the high set yesterday and the low set today (YHOD/LOD). If there were buyers and sellers piling into a certain level, that makes it significant and worth monitoring the HWB between them. Just like we all learned in 3rd grade, to calculate the average beween 2 points, we add them together and divde by 2: (A+B)/2=HWB