Tomorrow is a brand-new day, and anything can happen. But what we are doing here is looking at past patterns, new setups, and going from there. – HG
Today’s close marks the end of August monthly options expiration. Monthly options expiration historically brings about chop in the indexes, with price in the S&P futures closing around the same place it opened on Monday. Though we didn’t end up getting that this time, closing 16 points down from Monday’s open. Trading is all about recognizing past patterns using those, coupled with present technical analysis and market behavior. The last few monthly expirations (as is historical) have been pretty choppy, and traded in tight ranges. March, April, June, and July all gave us a slow grind, albeit choppy, grind higher. The exceptions were May and this month, in August, where we saw slight sell-offs during the week, widening the range more than usual.
S&P Futures Chart – 8/18/17 – Last Six Monthly Expirations
What happened this week? Thursday, just like last week, we experienced strong selling pressure. Each time we’ve gotten a strong flush, we have tried placing hedges to the downside, but this market has been unstoppable, and each flush lower simply brought us another rip higher (as well as an opportunity for great long entries). Unlike last week where we dumped our longs as the price action on their respective daily charts pushed through the 21 EMA. This week, while the Nasdaq (NQ) and S&P Futures (ES) are printing below the 21 EMA for two days in a row, and it is a giant red flag for the long side, our individual positions that we are holding through the weekend on BZUN, WDAY, and CTRL, are all still intact. With much caution about the overall markets, we continue to hold the positions that are structurally intact. We are rather light, and are waiting to see what next week’s action brings as far as new opportunities in the market go. What does it mean when we say our remaining positions are structurally intact? It means the trade setup hasn’t been violated, and even if they are down from entry, the trade setup is still valid and we are holding. Check out the below example in CTRL.
CTRL Example – 8/18/17
This setup fit Henry’s parameters for a bullish setup, coupled with a daily and 195-minute Squeeze. He legged into this trade in multiple stops, with his first entry at $22.66 on August 9th. Henry always works to get the best entry possible, to ensure the least amount of heat. As such, with this squeeze setup, he entered when price was near the 21 EMA. He then added more throughout the week. Those four black bars weren’t fun to hold through as far as pullbacks go, but Henry was watching the Fibonacci 0.618 retracement that offers an important level of support very closely. When Henry saw price pullback into the 0.618 and hold, he knew it wasn’t cause for concern. The Squeeze hadn’t even fired yet, and though price did fall through the EMA’s, support at the .618 kept us in the trade. It was a good thing too, because news on Friday brought CTRL up 11%, and our patience paid off. We are still in CTRL, as we haven’t hit target prices just yet. Stay tuned for how it behaves going into next week. Price targets are the green Fibonacci extension levels up ahead.
After this week’s action, I think the traders said things best themselves. Let’s look to each of them for what they are looking for, going into next week.
John – Another week, another extraordinary buy the dip opportunity? This action feels more corrective than toppy. Corrective simply means 3 to 5 weeks of violent back and forth before the next leg higher. We don’t want to assume, of course, that all will be well in the end. What this comes down to is time frames. If you are trading a weekly chart, then this price action isn’t much to write home about, and all you can do is stick with the longer-term trend, which is up. If, on the other hand, your average trade lasts a few days, this is the type of price action that can feel very much like a hangover. The solution? Dial it down. While looking at a weekly chart can be comforting, if your average trade lasts a few days, it can also be deceiving. It can provide a false sense of security. Unless and until we see indexes closing back up above their daily 21 EMAs, I’ll be using the 30-minute charts as my guiding light. This means being quicker at getting out and reversing course. It means being willing to hold onto a trade for less than 24 hours. It means playing the violent back and forth directly, instead of trying to hold through it or trade around it. How does this action bode for next week? My main concern going into Friday was that we could get another solid sell off, which would lead to margin call Monday. Friday has been quiet, and the current price range is taking shape. I’m looking for the markets to trade back and forth within that range before building up the courage to either break back up to the upside, or roll over and continue to push new support levels. The good news? It won’t be dull . . .
Carolyn – I’m trying to think of the best way to word this. I do know that the S&P is vulnerable to more of a decline, however I also know that I have time and price at today’s low. I also have more timing factors coming in early this next week. So, bottom line, if price can hold above today’s low or a low made early next week, I have reason to look for at least a corrective rally. My risk definition will be below key levels on my SPX and ES futures charts. Let’s see if it holds or NOT!
Henry – Volatility is back in a big way after the drop we saw on Thursday. If there was an example to think about what a “Pitbull Low” looks like, last Thursday was absolutely it. The drop was driven by the North Korea scare (if you have to have something to pin it on) and I love fading moves like that. Without getting too far into it, I felt fairly confident nothing would happen over the weekend, and we’d see a bounce into Friday’s expiration. That was all going according to plan, right in line with those 5 points I shared that were looking for a bounce, then Thursday volatility was back. Here again, you could find some headline if you have to, but ultimately, I see volatility being back in focus, I’m looking for the VIX to hold the 12 handles and for the Nasdaq to have at least one more significant shove lower before we start to find our footing. Inside that I do still have a few stocks I like being long. CTRL was the best of the week, and a great example of when you might want to hold even if you’re closing below the daily 21 EMA. Symmetry resistance held in WYNN quite well, and the neutral play in FDX worked out well also. I did close out several positions in names like LEN and TXN where I’ll look to get back in on the weekly once the market starts to shape up.
Bruce – I have lightened up substantially on my number of positions as this week was so erratic. While I do think we could rally next week and resume the uptrend, I think there was a lot of damage down and we could go lower. I will keep cash and stay light and nimble. I am primarily watching the NQ for direction. Ideally, we chop and are range bound with elevated vols. That is best for trading.
Neil – It’s going to be a tricky week. Below 2440 ES I will be bearish for a 2400 target. Above 2440 I will be looking for another V shaped bottom recovery like we’ve seen several times previously. In that case, we target more new all-time highs. Line in the sand for me is 2440 ESU7.
Trade of the Week Follow-Up
If you missed our Trade of the Week on Monday, click here to see the original setup.
Expert: Carolyn Boroden
Trade Date: August 18th, 2017
A note from Carolyn:
“My initial setup in FDX is still intact as we are still above the Fibonacci price cluster. Some shorter-term traders may have stopped themselves out if they had some tight stops when we started to experience the pullback in the middle of the week. Bottom line, I think this setup still has a chance to play out. At this point we are definitely taking some heat. I consider myself WRONG the setup if the price cluster zone is fully violated below the 201.44 area.”
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