On Wednesday afternoon (9/11/19) I sent this note to Technical Trader subscribers. I’ve redacted the specifics here, but wanted to share the thinking with you.
In the September 8 Technical Trader I recommended the following:
Now that the market has tipped its hand to the bullish side at least for the short run, it’s time to take a shot with SPY calls. I like the xxxxxxxxxxxxxxxx. They don’t have the highest leverage, but they have intrinsic value at least intially, and they should retain some premium if it breaks against us. If you want higher reward potential with higher risk, then I’d go with the xxx strike. Both strikes are very liquid and could be bought at market Monday. In either case, I’d have a mental stop at 2960 on the S&P cash.
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On Tuesday, the S&P briefly traded as low as 2957 a couple of times. Had you followed my recommended mental stop you would have sold the XXX calls. If you didn’t and you are still holding them, congratulations!
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Sometimes stops are too tight and the market takes them out, then whipsaws. These shakeouts have become all too common. This looks like one of those.
The chart patterns and indicators still look bullish on the daily charts. They also look bullish on the hourly charts I watch during the day when time permits. Although, here late in the day on Wednesday, there’s a chance that the breakout will fail. That would be confirmed on a close below 2989. If that happens then we stay out.
But the market holds above 2989, then I would again recommend xxx xxxx, but this time with the expiration of xxxxxxxxxxxxxxx giving us an additional 10 days from my original intended expiration.
I would buy them only on a breakout through xxxx on the S&P500 cash index. I’d look at either the xxx or the xxx strike, depending on your risk appetite. The xxx is out of the money and the riskier play, but offers higher percentage profit potential.
Both are reasonably actively traded, with tight spreads. Small quantity orders can be handled as market orders with little added risk. I would only place the order if and when the S&P 500 clears xxxx this week. Otherwise, sit tight.
Now, about that stop. Stop setting, even if only a mental stop, seems to be becoming more of a crapshoot than ever. We look for key support levels that, if broken, would suggest that the trend had turned against us. But more and more often, those turn into shakeouts.
If and when the market breaks through 2996 here, that should become a support level, but it’s too tight for setting a stop. Regardless of what shenanigans occur around this level, as long as the S&P stays above 2970, then the trend is still up. I’d have a mental stop if the SPX falls below 2970. That includes if you are still holding the originally recommended calls.
Meanwhile, a breakout here should target 3025 quickly, in which case we should see material profits.
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