Simpler Sentiment: Monthly Expiration
This week has been a bit of a rollercoaster in the indexes, but at the end of the day, we know and expect that monthly expiration is characterized typically by chop that can whip us around during the week, but we generally end up at the same place that we started at the beginning of the week. Our trading typically reflects that, and the strategies we place during this week always keep expiration in mind. While it’s not the best time to be aggressively long, some of our directional setups did end up playing out and meeting targets this week. Our traders like to add pinning plays, as well as focus more on theta decaying positions during this time.
As for the indexes? The S&P Futures opened up at $2380.25 on Monday, November 11th, and traded as low as $2555.50 on Wednesday, and as high as $2589.50 on Thursday. That made for about a 35-point swing in two days, which is a little more volatility than we’ve been getting, as of late. As of this writing, the ES has traded sideways all morning, trading at $2580 – exactly where we opened the week. Now, we know the market markets like to do this every monthly expiration, but that doesn’t mean it’s easy to withstand in the moment! While we didn’t have a ton of pinning plays on this week, it was primarily about holding fast through our directional positions and maintaining our cool. Let’s check out one example of our tickers that met targets on Thursday – Red Hat.
Lesson for the Week
This week, I wanted to show a perfect example of a directional trade in Red Hat Inc. (RHT). John, Henry and I all got a piece of this one. Why did we love it? Well, it was a solid, bullish trending chart. That is defined by a pattern of higher highs, and higher lows, coupled with price printing above the moving averages which are stacked in perfect form. Charts like these are examples of where we just want to find any excuse to be long. On this one, we had a beautiful confluence of squeezes on the 78-minute, 195-minute and daily charts. Our entry was when price was hugging the 8 EMA on the daily chart, and before the first squeeze fired.
With a firing of the 78-minute chart, the 195-minute and then daily squeeze fired as well. This allowed us to scale out, taking profits at the 127.2% extension and then at the 161.8% extension. This example is about as perfect as they come. When looking for new trades – keep the ones that work out perfectly in mind, and focus on identifying this pattern again.
Let’s check in with our traders and see what their market outlook is for next week.
John: It’s hard not to be blindly bullish but that doesn’t mean I want to hold through the next pullback. Yesterday the markets rocketed higher with solid moves off the lows in the transports and IWM, with the Nasdaq etching new highs. Flash forward to today, and we have yen futures in the midst of one of their bigger one day up moves this year. It’s impossible for me to get really, really excited about further gains in stocks from these levels with the yen futures exploding. So what does that mean? It means I like stocks here, but I love them at the mean. Book profits on rallies, buy on pullbacks. Rinse, cycle, repeat.
Henry: On one hand this month’s expiration was very typical, on another it wasn’t the easiest to trade. What I see in that is a Friday where we’re going to close up a bit based off where we closed last Friday, but I wasn’t running in to buy the dip on Tuesday and Wednesday as much as I was managing positions I had on. At the end of the day, that was the correct move because I was able to be involved with Thursday’s rally, but that concept of selling at extensions and buying back at the mean is definitely something to consider. We had a good run with that idea in MU and a similar concept with RHT, though I’m still holding half of my position in RHT. GOOGL gave me reason to get in yesterday with the close above the 8 EMA and I’m going to do my best to see those Squeezes through. The daily Squeeze in BA and NFLX are two of my favorites right now, though we need to consider that next week may see some violent chop around light volume. That’s what I’m thinking as we start to round out NOV expiration.
Raghee: – I am expecting profit taking into the weekend after the post-House tax reform rally. It’s one less thing for the markets to worry about. However, energy stocks are a drag since the Norway sovereign fund proposal of unwinding some 35 billion in oil and gas shares. While it’s merely proposal that won’t be decided on until 2018, the market discounted the potential shockwaves to XOM, CVX, and SLB which are some of the largest holdings within this $1 trillion fund. Oil and gas futures did not sell-off and are long positions I will take into the weekend. The XLF and XLK setups from the chat room are also following-through from oversold levels. These were setups taken from the MFTA “contrast” scan I do every day. The JPY (yen) will be a story to watch closely into next week since despite strength in equities, the JPY continues to remain strong relative to the USD. The USD would normally be stronger with progress in D.C. Progress towards tax reform is a USD positive. The EUR has held its ground versus the JPY. Our EUR/JPY trade is holding support. The EUR strength could reflect the expectation of a European reflation trade. I remain a USD bear into next week (the December rate hike is baked in to the cake) and next year.
Bruce – Next week is a short week. I’m thinking it will be quiet, and more chop. There aren’t any big market catalysts next week, but Non-Farm Payroll is the week after that, so I’m betting we trade higher into that. That’s all I’ve got for now. I’m watching and waiting, collecting theta day by day!
Carolyn – The last time we had timing in the SPX 11/7-10…we did end up seeing at least a little bit of a pullback which was 39 points in the S&P futures. This pullback was within the range of a normal downside correction within an uptrend. Although the market could puke at any time, I still have to set up the buy side when we see these pullbacks and just define my risk in advance. At this point, 2605 is now the new S&P futures upside target if we continue to hold above the recent low.
Remember the way to make money with my work is with the following formula: Setup + trigger = trade entry and then you manage it!!
Danielle – Going into next week, I am keeping my eye on the daily and 195-minute squeezes that are currently consolidating. The S&P futures held a symmetrical pullback on Wednesday at $2555.50, and triggered long. Ideally, I’ll see this Fibonacci setup come through and these squeezes fire long, reaching a target of $2600 in the ES. Will it happen next week? Probably not, but you never know. Thanksgiving week can be slow. Either way, I have my eye on it and I am going into the weekend long BA, NOW, FB, BABA and MA. This week, I was able to take off profits on long setups that I had on FIVE, MU and RHT. Patience was the name of the game and after holding through the pullback on Wednesday, I was rewarded on Thursday. I will continue to play each setup as it comes, of course, with the context of the overall market in mind.
Trade of the Week Follow Up
Expert: John Carter
Trade: Long bet on XOM
Strategy: John sold a put credit spread, for a conservative long bet on this ticker.
Update from John: “For my trade of the week, I put on a December monthly 85/80 in the money put credit spread at $2.36, with the idea that by December expiration XOM will make its way towards $85. Thus far it is not an auspicious beginning, with the daily squeeze firing short. But with December monthly expiration, and a near 1:1 risk to reward ratio I have the luxury of time and adjustment, and I’ll be looking to add the 82.50/77.50 December monthly put credit spread today at 2.00 to bring in more credit and give the campaign time to play out.”
If you haven’t gotten a chance to check out our trading room, click here to sign-up for a $7 trial. For those of you who are members, if you have questions or need help, don’t forget my “What Just Happened” session every Thursday at 3:30PM Central in our Member Webinar room. The following is a list of topics for these sessions for the rest of 2017 and remember, these are included with an Options Gold membership.
Thursday, November 23rd – Four Basic Options Trades
Thursday, November 30th – Assignment
Thursday, December 7th – Defending Positions
Thursday, December 14th – Managing Winners
Thursday, December 21st – Order Entry Checklist
Thursday, December 28th – Correlation
Have a great weekend!