The Right Tool

June 1, 2018 | Allison Ostrander

Simpler Summary

As the opening bell rings and you pull up your charts, they may appear like the garbled blueprint of the Taj Mahal. As the Site Manager to the construction of the building you would not pull out a wrench to saw through a 2 by 4, instead you would need to know what tools work best in what stage of construction. This same metaphor can be applied to trading. As a trader, you are the Site Manager for building your Account, and the blueprint you follow is the market. Unfortunately, the market blueprint can seem a bit more unpredictable, as if the architect was a 5-year-old making adjustments in crayon every other second. This is why as a good Site Manager for your account, you have a tool box full of different strategies that you can implement for different market blueprints (conditions). Here are a few basic market prints and the Tools that work well with them:

 

  1. Rising Bias Blueprint: This is the most common type of market that you have traded throughout the years. The moving averages are stacked up, momentum is positive and increasing, and there is still room before we hit resistance. For this blueprint the best tools are rising bias strategies like a Long Call, Put Credit Spread, Long Call Debit Vertical Spreads, and Call Calendar and Diagonals.
  2. Declining Bias Blueprint: A great example (and the most dramatic) of this blueprint can be found from the pop of the tech bubble in the late 90s (on NDX), and the move lower in the markets from the housing recession back in 2008. The moving averages are stacked down, momentum is negative and weak, and there is still room before we hit support. For this blueprint the best tools are declining bias strategies like a Long Put, Call Credit Spread, Long Put Debit Vertical Spreads, Put Calendars and Diagonals, and Covered Calls.
  3. Consolidating/Sideways Bias Blueprint: This can be the most frustrating market for traders to trade and remain patient in. The moving averages are usually consolidated with one another, neither stacked up or down, Momentum is hugging the zero line with no conviction, and we trade in a tighter range between support and resistance. For this blueprint the best tools are non directional trades like Iron Condors, Iron Flys, Butterflies, Straddles, and Strangles.

 

As the Site Manager in charge for building your trading account, it is imperative to have all the tools and knowledge about how to trade these strategies so that you can trade no matter what market blueprint is popping up on the charts.  

Simpler Sentiment

John — Stocks chopped around this week, hovering below their profit targets right into the employment numbers.  With Friday’s report, the markets exploded and slammed into our profit targets, and we cashed in trades on GOOGL, FB, AMZN and the like.  A very good week.  Where do we go from here?  It’s still all up to the SPY.  Even with today’s strength, the SPY remains neutral and is still trading below its key .618 retracement from the January highs and February lows.  Although this market isn’t easy on the indexes, following the idea of “buying the strongest stocks and shorting the weakest stocks” has been a sound strategy.  For next week, I’m looking for early strength and then for the markets to take a breather.  Have a great weekend.



Carolyn — All the moving averages that I look at on a daily chart still suggest a bullish resolution to the upside in the $SPX.  We still have to take out the 5/22 time/price high to see more on the upside and this is what the chart looks like with the HURDLE it needs to clear:

 

David — Evidence continues to support the notion that the S&P 500 decline from January is merely a correction and favors the idea that the index will eventually print back at a new all-time high.  I continue to track an idea, that a new leg up began on May 3rd and am cautiously bullish now.  I’ll remain immediately bullish should the Voodoo skyline near 2719 hold.  If it breaks, then I will look for other spots lower.

Bruce –We had another wild ride this week with a a shortened week, the Italy “crisis” followed by the trade war and NAFTA “crisis”. All in all, we are fairly close to where we closed last Friday. I continue to stalk the 2750 level and while we have not been able to reach or breach that level, I continue to keep this in my sights. Once we do break that level, I think it may open the door to much higher prices. In addition, I think that the NQ will lead the way with the tech stocks starting to look better and move higher again. Dont forget we also have earnings season approaching soon as well which could push us higher as well. Have a great weekend.

Danielle —  Friday was the first strong day we have had in awhile. The S&Ps have been trading relatively sideways for the last three weeks, with a hint of volatility every now and again. I have been focused on Nasdaq stocks, primarily MSFT, INTC, AAPL and of course XLK, as the NQ has continued to trade higher despite flatness in the S&Ps. Today was a day you already had to be positioned for, which thankfully I was, however looking forward, there aren’t a lot of new entries I can take here. What I am waiting for, is a pullback in the main NQ leaders, XLK and the QQQs to load up going forward. Why? Because there are absolutely beautiful weekly squeezes in the Nasdaq, XLK and also the S&Ps. I am focusing on stocks with weekly squeezes (BABA, MSFT) going forward, and will look to buy them at every pullback opportunity. I go long into the weekend holding MA, AAPL, BABA, BOFI, ETSY and ATVI.

Sam — This week we saw the Crypto Majors – Bitcoin and Ethereum – push lower in to support levels from the April rally. So far price has bounced off BTC support and is holding. The number of Ethereum shorts in the market (ticker: ETHSHORTS on TradingView) is near an all time high as they piled in near the lows. This is a similar pattern to what we saw in Bitcoin shorts near the April lows.

A record high number of shorts + support levels + potential reversal pattern on the 4hr chart gives bulls the ball over the weekend if they choose to run with it. A big short squeeze is a possibility but price needs to hold the current levels through the Friday daily close and then push higher over the weekend to spook the shorts in to covering.

This is a short-term trading outlook as we think there is one more surprise down move left in the majors before a more solid support level is tested. Given the underlying technicals the bulls can run price up and put the shorts in a bad spot, if they show up over the weekend.

If we do get a short squeeze then the biggest beneficiaries will be the alt-coins. We have seen a lot of strength in Cardano (ADA) recently as well as IOTA (IOTA). Those symbols, and most alt-coins, will benefit if BTC and ETH can hold and move higher.

The ball is in the bulls court, they just have to run with it.

 

Carolyn Boroden says:

See the original setup HERE

Expert: Carolyn Boroden

Setup: Setup on FB

Update from Carolyn: The Trade of the week in FB has met the minimum targets for the setup.  The NEXT upside target comes in at 196.19 and then the bigger picture target remains at the 207-209 area.  Those who are shorter term oriented might want to ratchet up stops, since we have met short term targets and are a bit extended, along with a few time cycles that are due early next week that could force a pullback.  Actually we have one cycle today and then two between 6/4-5. Here is the chart to illustrate those decisions: