Diamond in the Rough

May 18, 2018 | Allison Ostrander

Simpler Summary

As the market moves out of consolidation and the overall pull back we have seen from earlier this year, there are a lot of charts setting up to make some nice moves. If the markets are able to break out of this consolidation to the upside, there will be some stocks that have the potential to just take off. This is the perfect time to scrub your watchlists and keep an out for those Diamonds in the Rough. One great tool to help identify those setups is the Squeeze Indicator. This is an excellent tool for finding charts that have the potential to make a greater than average move.

If you’ve already done this, you may find that there are a lot of great set ups out there ready to make moves. Whenever you go through your watchlist and you see a lot of good setups forming, it can be easy to feel like you need to jump into every trade. You might say to yourself, “if most of these work out, my account is going to skyrocket in profits.” Even if that might be the case, I caution you to not over invest your account. At times like this, you can find some great set ups across tons of charts, but if you were to get into every set up it would start to add up in capital and Risk. You may find that you’ve over risked the capital in your account, or opened too many contracts. Instead, it’s better to pick out some of your favorites from the list and look at the Risk vs Reward scenario you are setting up for those strategies. If the Risk vs Reward is set up nicely on the charts you choose, then you can still find yourself with winners without having as much Risk on the table. If the market were to reverse and your trades moved against you, you won’t find yourself completely out of money in your account and searching for a magic lamp. The market will always present trading opportunities, so even if there are a lot popping up at one time, don’t feel the need to get into every trade you see. Holding back the need to take every trade setup you see, is a great way to protect your current account value, but still find the opportunity to grow it in a conservative way.

Simpler Sentiment

John — The markets, after a strong couple of weeks, finished this particular week with a mostly monthly options expiration related yawn. The Russell is busy trying to show the big boys where to go, while the Nasdaq is trailing behind and the SPY and DIA are lost in the woods.  For next week, it really comes down to the SPY.  We ended in neutral territory, right in between the 50% and 61.8% mega retracement from the January highs to the February lows.  For next week, I’m looking to bet the move out of the gate.  That is, if we break to the upside of SPY 274.50, I’m looking for a major move higher. If we break below 270.00, I’m looking for some brisk selling.  In truth, I always hate an analysis like the one I just laid out.  “If it goes higher, but it.  If it goes lower, sell it.” Thanks, right? But in this case, it is warranted, as that is literally the box that will impact the world next week.  Straddle in and have a great weekend.

Bruce — This week we had very strange correlations. We crazy amount of chop in the ES as the NQ went nowhere. At the same time, the RUT has been on a tear to all time highs. Going forward I think that if the ES can get up to and clear the 2750 level, we can continue to higher levels. As much as I love the strength of the RUT, I think we could get consolidation in the RUT and possibly see some sector rotation. On the NQ, a lot is going to depend on the FANG’s and NQ heavy stocks such as AMZN, GOOGL to get going. Either way, we remain in limbo and I continue to trade lightly.

Carolyn — As far as the SPX is concerned, this index rallied into key time and price resistance last week and the rally has stalled so far from the key parameters.  Since the moving averages still support the bulls however, I’m focusing on buy setups at the moment as price is clearly the 200 and 50 simple moving averages and the 5ema is above the 13 ema.  I’m anticipating a resumption of the rally from somewhere above the 5/3 low. Specific levels and setups will be put out in the main trading room via S&P Futures.

Henry — One of the comments I saw from several traders in the chat room this week was the comment about a dull, or boring market. Usually when I hear that it strikes me as a complaint. As they would prefer to see indexes roaring higher (or possibly falling apart). Whichever side your find yourself on, try not to push it too hard during the week of monthly expiration. This is the perfect time to chop, and if you can approach that as a good thing, then it opens the potential to sell spreads and the passing of time, the dull market, can be excellent for those. We also saw how open interest can be extremely helpful when gapping into a given level. NVDA had a bid on Friday’s open on the back of some news, but the high open interest at 250 gave funds and “the powers that be” a reason to keep prices below that strike. These can all be very helpful themes when preparing to trade monthly expiration.

Raghee — I’m bullish Canadian dollar, energies, metals, AAPL , FB, and will continue to play the current chop on shorter term time frames. Now that we’ve got monthly expiration behind us, we can see if this market wants to head higher which is slightly my bias.

Danielle — The Russell has been the strongest index this week, with small caps stocks show solid gains. The S&P, NQ and Dow have been trading relatively sideways, which is expected during expiration. This week, I focused on expiration and looked for a sideways market. Expiration is one of my least favorite weeks, as I love a moving market, but we have to learn how to trade it, regardless. Next week, I’m looking forward to the marking moving – one way or another. What am I looking for? So far, the YM, NQ and ES have had daily squeezes that fizzled during expiration. At this point, it’s anyone’s guess but I vote on the upside. I don’t have any specific directional setups in the indexes, but with their current technical patterns, I look for them to trade higher.

Raghee Horner says:

See the original setup HERE

Expert: Raghee Horner

Setup: Setup on AAPL & FB

Update from Raghee: I am pleased with the way the 8 EMA held with the Propulsion Dots and I’ll ride that higher to revisit the recent highs.