The Simpler Summary
Monday and Tuesday were great trading days for us, and the price movement allowed us to take hefty profits from last week’s trades on Alibaba Group Holding Ltd (BABA), and Momo Inc (MOMO), which was an earnings trade and high short interest play, respectively. Wednesday finally brought more volatility, and raised the VIX up to a high of 16.3, only once seen other time this year, which was in April 2017. These have been the highest highs in the VIX since last year’s election. By all counts, the market has been extended the past few weeks and we were ripe for a pullback, that we finally got on Wednesday. Instead of panicking, what did we do? We kept an eye on important market correlations, and from there we could see that as the VIX and the Japanese Yen (JY) were exploding, which was pushing the stock market to sell-off, even without high $TICK readings. These market tells, along with the break of the last week’s low in the /NQ led us to exit many of our bullish positions. By Thursday, the VIX and the Yen (JY) started losing steam, which allowed the market to recover a bit from Wednesday’s sell-off. By Friday’s close, the SPX recovered most of the losses from the sell-off, climbing from a low of $2352.72 back up to a high of $2389, 4 points shy of filling Wednesday’s gap, giving us a range of 53 points. Check out the chart below on the SPX.
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Our traders continued focusing on a few key bullish stocks that don’t care what the overall market is doing, and shorting those that are clearly breaking down, adding a mix of earnings plays and options expiration trades in the mix. Wednesday’s sell-off gave us the opportunity for discounted entries on Thursday, especially in relation to Carolyn and Henry’s Fibonacci work. Sometimes all you need is a good sell-off to enter on a pullback!
Additionally, as this week is monthly expiration, we did setup a variety of pinning plays on Citigroup, Inc (C), JPMorgan Chase & Co. (JPM), Snap Inc. (SNAP), and Starbucks Corporation (SBUX). These plays were selected in part due to high open interest at certain strikes, and looking for chop. Why does open interest matter? When there is a lot of open interest, price hovers around strikes with high open interest due to a lot of back and forth action. Chris especially loves options expiration Friday’s so much because of the low price of options, combined with his analysis of chart patterns, open interest and support and resistance. Options expiration Friday is his favorite trading day, and generally the most profitable. This week, his favorite expiration plays were in the SPX and Priceline Group Inc (PCLN).
Sentiment for Next Week
Our traders always consider their overall feelings in the market before placing their trades. Let’s check in with our traders to see where their heads are at going into next week.
John – After an ugly Wednesday where the VIX experienced its 8th largest percentage increase of all time (should have known since I was getting on a plane to Vegas), the markets are back to normal as we head into the end of the week. Or are they? A lot of the weekly and daily squeezes that have been driving this market higher are now in neutral mode, which means this is now turning into a stock picker’s market. This means I want to be long bullish stocks – but also have short exposure to stocks with bearish patterns. In terms of the indexes? I’m looking for back and forth.
Chris – As for market outlook, I see the SPX trying to test 2380, and then coming back to test the 2350 level. I think the best play will be to short the stocks that are already breaking down, like United Parcel Service Inc (UPS), Bed Bath & Beyond Inc (BBBY), Best Buy C Inc (BBY) and Alaska Air Group Inc (ALK).
Henry – This monthly expiration was one of the most interesting I can recall. Everything was going as expected into Tuesday afternoon, we saw the tradeable low on the Thursday prior, stocks continued to shake off headlines and I was expecting a fairly normal end to the week. It reminds me that anything can happen with trading, and that the unexpected moves are always unexpected. While that may seem like an obvious comment it’s why I try to remind myself that each trade is just another in a series of 25 and acknowledging the complete risk of that helps me stay level when the market takes a steep drop. I also find that the daily chart of the VIX with standard Bollinger Bands continues to be helpful. As a general rule, two closes above the upper band signals a low in equities and that was helpful in not getting short at the lows on Wednesday.
Carolyn – I still have to call myself a cautious bull. If the market gives me buy setups and those entries get triggered...I take the trade setup. Click To Tweet After the panic earlier this week, I’m still going to stay alert to potential failure, but we have to TRADE the setups that are in front of us. There were some great entries in Aple Inc (AAPL), Amazon.com, Inc (AMZN), Tesla Inc (TSLA), Netflix, Inc (NFLX) etc. with the recent breakdown!
Raghee – This market continues to hammer the U.S dollar. Regardless of political shenanigans, the greenback may rip higher…one…more…time. And then sold into any such bounce. June FOMC rate hikes are still likely and the reason the dollar still can’t hold support is because of the euro. I am holding on the long EUR/USD position and long Nikkei and Nasdaq. Buying those pullbacks into uptrends is still my bread and butter. I am also short the 30-Year. The more the FOMC Balance Sheet is part of the narrative, the more I like this overbought fade short from 154-0.
Bruce – I am trading very light and expect choppy rangebound. We are still in an uptrend, but with political tensions rising, we should be very careful and don’t be surprised in the short term by more quick moves one way or the other.
Neil – I’m cautiously optimistic at best as the ES failed yet again @ 2387. The Bonds look like they have plenty of room to the upside as does Gold. For some reason the bonds refuse to sit down and the ES fails to convincingly trade through 87. I will not be at all surprised to see the beginning of the week to start off strong but to fail mid week and close lower as the bonds continue to trade higher in search of a 157+ handle.
John Clayburg – The bear bit the bull in the butt this week & he wandered off into the woods to heal up. His injuries are not fatal but he’ll be on the sidelines for a while until Mr. Bear gets worn out…
As we look back on the week, let’s check out how our Simpler Trading Trade of the Week is playing out. Reviewing why the traders have chosen these trades, the method behind how they read the charts, and how they played out over time is one of the best ways to become familiar with the setups we use and why we use them. Check out the summary below.
In case you missed it, click here to check out our Trade of the Week.
Expert: Chris Brecher
Trade Date: May 18th, 2017
Setup: Put butterfly in NetEase IncNTES (NTES)
Strategy: Overall market is at a juncture, and as such, is placing this trade with that in mind. NTES has a nice red candle, and is overbought on a daily but oversold on an hourly. Chris identified support and resistance, and placed the butterfly with his strikes surrounding that.
Target Exit Price: Price action chopping back and forth between 262.50, $272.50 and $282.50 – the wings of the butterfly.
Stop loss: ATR trail stop cross on a 15-minute chart
NTES Update – 5/19/17
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Chris is very quick to get out of his trades when they don’t do what he wants, and due to the options strategies he uses, his loss is minimal when they don’t work out. He states that he made the video for trade of the week just before market open on Monday, May 15th, and he wishes he waited just a bit longer to select this trade. After the market opened and price crossed over the ATR trail stop on a 15-minute chart, he exited the trade almost immediately for a minimal loss when price was just above $270. As you can see, price continued to climb until it hit its peak on Wednesday, and Chris’ quick stop out kept him from any major losses on the trade.