A nemesis of those that are swing traders — and many of us — are in a market that is indecisive and choppy. That is what is going on for the last couple of weeks. Considering the holiday week coming up, it’s hard to imagine that the broader markets are going to make a decisive move one way or the other.
However, indecision isn’t necessarily a bad thing when it comes to trading options credit spreads. And they had been doing just fine for us. A major advantage of the MasterTrader method of trading those spreads is the use of chart analysis in addition to the options analysis.
I have never done it any other way. However, I have seen many option services where their primary focus is high implied volatility as a guide to when to fade that. Because these services or methods that use just the numbers — and believe that charts don’t work– I’ve seen them get run over time and time again.
Their management of these wrong-way trades that go against them — for what could be months — and I have even seen a few that have held onto these positions for years, is to roll the options into the future and go into “hope mode.” The theory is that at some point the trade will turn around. Hopefully, their spouses have knowledge of options trading in case they don’t live that long.
Personally, I hate having my mistakes on my face day after day. If you have to use the “roll them method” please email Dan and me with your thoughts on that and positions to analyze. The method of rolling could be something for an educational discussion in one of our monthly meetings. Also, very soon Dan and I will be starting a live show on Facebook to discuss our technical strategies for trading and investing in stocks and options.
If you have ever done one of these trades against high implied volatility and then were caught on the wrong side of it, you either took a nasty loss or rolled them. Most times, these high implied volatility spikes occur on big moves. The way to not be crushed by these is to recognize an “igniting move” versus an “ending move.”
A simple way of recognizing the difference between the two is that the “igniting move” often starts with a Wide Range Bar (WRB) and the “ending move” ends with a Wide Range Bar. This simple observation by the chart naysayers would save them — and unfortunately there are many (which is a gift to us to those wanting to learn proper objective high-odds trading).
DOW JONES INDUSTRIAL AVG.
Above is the chart of the Dow Jones Industrial Average that we review each week. Prices didn’t move much where they were the prior week, but are down slightly.
As you can see, prices are a bit extended from the 50-MA (green line). That doesn’t always mean that prices are going to consolidate or pull back, but the further they get away from a moving average, the greater the likelihood of that happening. It’s just a simple observation that works.
As a visual representation of the recent consolidation through the eyes of the 20-MA (blue line), you can see that the moving average is now intersecting through the middle of prices and flattening. Before that, prices were rising above it and it were rising at about a 45° angle. We use moving averages as a visual aid to speed up the analysis, which could be done without them, of course.
I’ve placed a point below Wednesday’s low as a reference point of such even though it only has two higher lows to the right at this time. A move below that would open the door to the possibility of a test of the 50-MA. However, do not forget the reference points of the unfilled gaps that are still slightly above the 50-MA at this time.
The other broader market indices do not look the same as the Dow, but that isn’t too unusual. However, the Dow has a slightly more bearish look to it to suggest a short-term move lower. That being said, historically, the markets do not move down much into this holiday; rather, they tend to move higher.
On Wednesday at 2 pm ET, the FOMC minutes are reported, and that may be the highlight of whatever may move the markets. Of course, the markets are closed on Thursday for the Thanksgiving Day holiday. The Friday after the holiday typically has a bullish bias, where stocks move up in the morning, and then trading becomes quiet.
Dan and I wish you and your families a wonderful Thanksgiving Day holiday. If you’re traveling, we wish you safety, no delayed flights, and light traffic!
BROADER MARKETS
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TREND MATRIX AND INTERNALS
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New Trade Ideas
Below is a weekly chart of 3M Company (MMM).
Trade: Over $230.00, consider shorting Dec (12/15) $220/210 bull put spread (25 DTE) for current mid-point but a minimum of $.70/share (closed at $.80/share).
Technical Setup: Master Trader Buy Setup (MBS) on weekly chart after bullish retracement from Pro Gap Breakout on daily.
Option Strategy: Bull Put Credit Spread (BPS).
Stop Loss: $220.48.
Below is a daily chart of The Home Depot, Inc. (HD).
Trade: Over $168.12, consider (a) shorting Dec (12/15) $165/155 bull put spread (25 DTE) for current mid-point but a minimum of $1.35/share (closed at $1.46/share), or (b) consider buying Dec (12/15) $160/175 bull call spread for a limit of $7.90/share (which has some positive time decay, closed at $7.62/share). Note: Trade (b) is higher reward-risk since more directional.
Technical Setup: Breakout on daily and weekly after +WRB from bearish gap down to r50-MA, bullish monthly.
Option Strategy: Bull Put Credit Spread (BPS), Bull Call Debit Spread (BCS).
Stop Loss: $164.68
Below is a daily chart of Unum Group (UNM).
Trade: Over $53.62, consider buying Dec (12/15) $50 calls for a limit of $3.88/share (which is only $.25/share time decay). Note: Long Stock is also acceptable but long calls have superior reward-risk.
Technical Setup: Breakout on daily and weekly after multi-week consolidation, bullish monthly.
Option Strategy: Long Calls (LC).
Stop Loss: $52.68.
Below is a daily chart of The Goldman Sachs Group, Inc. (GS).
Trade: Under $237.12, consider shorting Dec (12/15) $250/260 bear call spread (25 DTE) for mid-point but limit of $.72/share (closed at $.77/share).
Technical Setup: Breakdown daily and weekly.
Option Strategy: Bear Call Credit Spread (BCS).
Stop Loss: $247.72.
Below is a weekly chart of Illinois Tool Works Inc. (ITW).
Trade: Over $159.10, consider shorting Dec (12/15) $155/145 bull put spread (25 DTE) for current mid-point but a minimum of $1.30/share (closed at $1.50/share).
Technical Setup: Breakout on daily and Master Trader Buy Setup after +WRB from bearish gap down monthly.
Option Strategy: Bull Put Credit Spread (BPS).
Stop Loss: $154.98.
Below is a daily chart of Ingersoll-Rand (IR).
Trade: Over $85.43, consider shorting Dec (12/15) $82.5/77.5 bull put spread (25 DTE) for current mid-point but a minimum of $.64/share (closed at $.70/share).
Technical Setup: Bullish +123 consolidation following failed breakdown around Major support on daily.
Option Strategy: Bull Put Credit Spread (BPS).
Stop Loss: 83.08.
Below is a daily chart of Delphi Automotive PLC (DLPH).
Trade: Over $100.50, consider shorting Dec (12/15) $95/90 bull put spread (25 DTE) for current mid-point but a minimum of $.50/share (closed at $.65/share).
Technical Setup: Bullish consolidation after Pro Gap Breakout daily, bullish weekly and monthly.
Option Strategy: Bull Put Credit Spread (BPS).
Stop Loss: $95.88.
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Happy trading! If you have any questions or comments, please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com
All the best,
Greg Capra
Managing Director of Master Trader
Pristine’s Founder and Creator of the Pristine Method
Dan Gibby
Chief Options Strategist
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NOTE: Master Trader will show opening and closing prices of all stock and option trades. We do not recommend proper share size for your particular trading style, risk tolerance, or account balance. We urge you to calculate your own share size based on your individualized risk parameters, Trading Plan, and familiarity with the proposed trade strategy and risk.
NOTE: Master Trader and its representatives might have existing positions in these and other trade recommendations before or after suggested herein. Additionally, we often manage them differently for internal purposes based on different risk parameters than noted herein.
