“In trading, you have to have a sense of humor. The more serious you take it, the more the markets will have their way with you. You must have no attachment to the outcome.”
Since the end of July, we have seen a considerable amount of chop and indecision in the indexes. Admittedly, trading these markets is not as easy – or as much fun as trading strong, trending markets. How do we trade this? “This is just a market where you can’t get too comfortable long or short. As a teacher of the dark arts in Harry Potter says, ‘Constant Vigilance.’ Overall, just trying to get more in sync with shorter, more violent ebbs and flows. This means fewer positions, so it’s not as difficult to change gears,” as John states.
Anyone who has followed us for a while knows that we love our Nasdaq stocks – especially being aggressively long tickers like AMZN, NFLX, TSLA and NVDA, riding the coattails of movement in the indexes. However, this is not the time to do that unless a specific setup presents itself. A big part of being a well-rounded trader is understanding not only the setups on each individual chart, but understanding the overall market conditions that make it a good or a bad time to take these setups. Right now, how are we trading these markets? We’re trading them with a mix of bullish and bearish positions, with smaller size and a watchful eye.
What did we trade this week? Henry and I continued to hold our Paypal Inc. (PYPL) longs, waiting for the daily squeeze to fire. John got long Nvidia (NVDA) for a swing play using the daily squeeze but decided it was advisable to exit before AVGO earnings, as earnings have been particularly crazy this quarter. Henry jumped in NVDA looking for a shorter-term day trade on the smaller time frames. We always love to take a stab at earnings, and Henry’s unbalanced butterflies on Lowe’s Companies Inc (LOW) and Salesforce (CRM) worked exactly how he wanted with the price action after the reports. John traded ATVI to the long side while Henry looked for entries in ADBE and EA. We didn’t get the entries we wanted just yet, but they are on our radar. John placed a bullish income trade on Boeing, co (BA) due to the strength it’s shown in spite of the chop in the indexes. Henry’s bearish butterflies in both NFLX and AMZN were a great way to play the downwards chop in the NQ stocks. John took a bullish stance on ULTA earnings, which didn’t work out as planned, and showed us further our preference in playing the after-earnings move this quarter.
How will the chop resolve itself? As John states, “My feeling is that this market will resolve itself to the downside. Any longs I have, I am pretty nervous about. Why hold longs if I think it will rollover? Just because I think it will, doesn’t mean it will. I want to have long exposure and short exposure in this market. I’m deliberately trying not to take on a bunch of new positions because I want to be able get a better sense of the market flavor.” Check out the daily chart of the Nasdaq below. In this chart, check out the chop and compression that forms a wedge – which way will it break?
Nasdaq Futures (NQ) Daily chart – 8/24/17
(Click on the image below to enlarge)
What about the pullbacks? As John states,
“I don’t mind holding through pullbacks as long as the signal remains valid. But that is all about intestinal fortitude. There will be more risk involved buying higher. The way to get around that is by lowering your position size and keeping cash on hand. Think of it this way. You’re walking through the jungle, and you just shot all your bullets in your gun and you walk across the corner and there is a lion – and you’re dead. Have a very loaded gun. Have a couple positions on, but be ready. 80% cash is really the ‘being ready’ phase. We just want to make sure we are locked and loaded for anything.”
Let’s check in with the traders and see what their sentiment is going into next week.
John – We really are just sitting around waiting for either an explosion or an implosion in the markets, all driven by the daily squeeze developing on the Nasdaq. What makes this market “special” is that the rallies can still be fierce and out of the blue, ala Tuesday. When looking at the transports, the yen and big stocks such as GOOGL and AMZN, the only side that makes sense is bearish. But when looking at the 10 day moving average of the put call ratio, it is saying, “There are too many bears here. First let’s destroy their dreams with a nice rally, then we’ll take this sucker down.” What to do? This is an environment where long straddles on the QQQ makes sense (Sept monthly 142s). From there, I’m focused on shorter term squeezes on the 39 and 78 minute charts, as well as looking for opportunities to take advantage of any conviction type moves in individual stocks. For me, a balanced portfolio looks like this: Long straddle on the QQQ, bearish trade on a stock like AMZN, bullish trade on a stock like BA or BIDU, 80% cash to be ready for the elephant when it starts to make its move through the brush.
Henry – I echo John’s sentiment and will be paying close attention to the daily Squeeze we’re starting to see in the yen. I also think stocks like FB and NVDA are in very precarious positions. FB is definitely a bullish chart, but a break of $165 could send shares to $160 fairly quickly. AMZN is another that I think makes for a great short. The directional puts will really come through if we get a break in the indexes, and if things trade more sideways the butterfly will be a little easier to hold. It was great to see ADSK perform so well, but of course ULTA muted my Friday earnings. Notes to self include the overall bearish pattern in UTLA where as ADSK was just a few dollars from a lifetime high. Into the weekend I’ll have some mixed exposure. Still long CTRL BIDU CAT FXE LL PYPL and WDAY. Bearish in QQQ GOOGL AMZN AAPL NFLX and FDX and ensuring I have some cash on hand should we start to see those elephants.
Bruce – I see a lot of chop in the indexes. I’m not worried as long as the S&P stays between 2470-2430. I’m focused on selling premium – mainly farther dated iron condors. In any case, if we do see a correction I am hedged in the SPX.
Raghee – We are seeing the much-anticipated follow-through in the euro. Earlier than expected since Janet Yellen’s speech was moved up two hours. Draghi is due at 3pm ET. The 1.19 is the first upside target and at that point a breakeven stop on our long positions from 1.17 and 1.18 should be in place. I’m glad we put some space between us the the indexes. I am looking puts in gold and maybe bonds but not yet. The gasoline market “RBOB” is taking reacting to Hurricane Harvey hitting the Texas coast. The path of the storm makes it a refinery play while a hit on the west coast of Florida would’ve been more a crude play. Crude remains unphased. OIH, SLB, and HAL are still shorts. I’m looking at a re-entry in SLB today.
Carolyn – My preferred scenario in the S&P is that the two-step pattern into the Monday’s low might be more important due to price, pattern and TIMING factors. If it is, then my upside target remains at the 2510 area which is the 1.272 of the two-step pattern. With that being said…You always have to see what might be in the way of a scenario that you are favoring is. Well in this case it’s the new bearish pattern from the 8/8 high. If the rally from the 8/21 low is going to resume towards new highs we need to clear the 2474.93 swing high made on 8/16….along with the resistance that comes in below this at the 2454-62 area. So even though we’ve seen a nice rally off the 8/21 low…this market is not doing what I need it to do to confirm that it is more important in the bigger picture. Remember…take this market from ONE decision to the next…I outlined a lot of this in one of my free videos earlier in the week…don’t forget to check those out on twitter!!
Trade of the Week Follow-Up – (FDX)
Update If you missed our trade of the week on Monday, click here to see the original setup.
Expert: Henry Gambell
Trade Date: August 21st, 2017
Strategy: Tricky spot in the indexes, FDX buy zone still in-tact, resistance with the moving averages still in-tact, looking to a delta neutral play. Trade: Iron fly at 205. Looking for theta decay over time.
A note from Henry:
“This week’s iron fly was closed for a scratch and next week’s expiration is still in play and looking good. I think the daily squeeze may resolve to the downside. Since it’s trading at 208 and I’m at the $205 strike, that gives me some bearish exposure. Also, if you added the short call spread on the rally that helped a lot!”
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