The sell signal — and coming short-term correction — mentioned in the July 24th newsletter is obviously underway. The selling last week was broad-based, which shook the confidence of those — even the most bullish.
There were a few calls for a welcome and overdue correction of 10%. Of course, that is possible. We will see how things may unfold further. Historically, with a 10% drop from the high, there will be few suggesting buying at that time. It’s not easy after seeing the markets being beaten down. What does make it relatively easy, however, is having a method that historically works — and we do.
The Retail Sector that was in focus last week with so many companies reporting earnings fell almost 4% last week. The star under performer in the sector being crushed was Footlocker (FL), down just over 30% for the week. Wow! It’s down over 50% year-to-date and it will probably get worse.
The Internet and Technology Sector ETFs that have been out performers were down about 1.4% and 1.6%, respectively.
The other sectors that we track were down between 2% and 3% on the week. The broader markets and sectors did stabilize on Friday, but that is the norm after a big down day like the one seen on Thursday. What now?
We will continue to follow the trend, support and resistance in multiple time frames, as well as our market internals in the systematic way that we do.
This week we will look at some possible downside targets.
DOW JONES INDUSTRIAL AVG.
Above is the chart of the Dow Jones Industrial Average that we review each week. The Dow has now established a lower low and a lower high, but still above Major Support (MS). On Friday, prices stabilized on Minor Support (mS) and it’s likely that MS will be tested.
The prior swing low that formed at the unfilled gap is now our reference point of Minor Resistance (mR). However, the way prices came down on Thursday has created a price void above Friday’s high (look at your intra-day chart) which does open the possibility to a deeper retracement.
If you are a new subscriber, you will soon see how accurate the support and resistance ares are that are referenced week to week. These are based on only price support and resistance. Set alerts at them to monitor.
Trend lines, Fibonacci Retracements, Channels, Ichimoku Clouds, and the like are subjective, misleading and unnecessary. They will confuse and miss-direct you.
If you are using these technical tools or a service that uses them, you will see that 99% of the time, any turning point referenced by those technical tools will be aligned with price support or resistance.
If the prices are hidden behind all of the lines, it’s either a search for the “Holy Grail” or an indicator sale. Simply, look to the left for the truth — price.
BROADER MARKETS
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TREND MATRIX AND INTERNALS
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Below is a daily chart of iRobot Corporation (IRBT), $97.28.
Trade: Consider selling the following $10-wide Iron Condor: sell Sep (9/15) $110/120 bear call spread and sell Sep (9/15) $85/75 bull put spread (25 Days to Expiration (DTE)) for current mid-point of around $.90/share.
Technical Setup: Range bound daily after Pro Gap and breakdown, resistance above and support below, time decay strategy.
Option Strategy: Iron Condor (IC). Simply, is selling both an out-of-the-money Call Spread and an OTM Put Spread. Defined risk strategy used when you expect a stock to stay range bound by expiration. You make maximum profit (net credit received) if the stock closes between the short strikes at expiration.
The return on investment (ROI) is the credit received divided by the maximum loss (i.e., width of strike prices of the largest spread less total premium received). The break-evens are the short put strike price less credit received and the short call strike price plus credit received (i.e., also your cost basis if assigned the stock).
Considered a neutral strategy since we are expecting range bound activity. Trade has positive theta (meaning you make money on time decay) making it a high probability trade since we time entry with the technical pattern.
Max Gain: Credit received, 9.9% ROI ($.90/9.10) if expires worthless.
Stop Loss: $84.88 on downside; $109.02 on upside, close entire position.
Below is a daily chart of Canadian National Railway Company (CNI), $79.50.
Trade: Under $79.48, consider two trades: (a) shorting Sep (9/15) $80/85 bear call spread (25 DTE) for around closing $1.10/share mid-point), or (b) buying Sep (9/15) $85/75 bear put spread (25 DTE) for around closing $5.50/share mid-point (more bearish directional trade).
Technical Setup: Anticipated Breakdown following deep retracement from new highs and bearish consolidation daily.
Option Strategy: Bear Call Credit Spread (BCS); Bear Put Spread (BPS). A defined risk strategy where you make the maximum profit if the stock closes below the shorted put strike at expiration. We buy bearish puts and then sell a put strike price lower to reduce the cost of the long put and generate time decay.
The return on investment (ROI) is the Gain divided by the Debit, which is the maximum loss. The break-even is the higher strike price plus debit paid. Considered a mildly bearish strategy since we are not buying puts or shorting stock and willing to cap our gains in exchange for gain from time decay.
Stop Loss: $80.82.
Below is a daily chart of Johnson & Johnson (JNJ), $132.63.
Trade: Under $132.38, consider shorting Sep (9/15) $135/140 bear call spread (25 DTE) for mid-point (closed at $.46/share).
Technical Setup: Breakdown and Topping Tail following failed breakout attempts.
Option Strategy: Bear Call Credit Spread (BCS). Defined risk strategy where you make maximum profit (net credit received) if the stock closes below the short call strike at expiration. We sell call strike price above resistance where the pattern suggests that the stock will not close above at expiry, and simultaneously purchase higher strike call than the one sold as a hedge and to reduce margin.
The return on investment (ROI) is the credit received divided by the maximum loss (i.e., width of strike prices less premium received). The break-even is the short strike price plus credit received (i.e., also your cost basis if assigned the stock).
Considered a mildly bearish strategy since we are not buying puts (or shorting stock) and just calling a short-term top in the pattern. Trade has positive theta (meaning you make money on time decay) making it a high probability trade since we time entry with the technical pattern.
Max Gain on Call Spread: Credit received. Cost basis if assigned is lower strike plus Credit.
Stop Loss: $134.82.
Below is a weekly chart of SPDR Series Trust – SPDR S&P Oil & Gas Exploration & Production ETF (XOP), $29.46.
Trade: Under $28.98, consider shorting Sep (9/15) $31/33 bear call spread (25 DTE) for mid-point (closed at $.30/share).
Technical Setup: Continuation Breakdown daily and weekly.
Option Strategy: Bear Call Credit Spread (BCS).
Max Gain on Call Spread: Credit received. Cost basis if assigned is lower strike plus Credit.
Stop Loss: $30.72.
ADJUSTMENTS AND COMMENTS ON OPEN ADVISORY LETTER TRADES NOTE: OUR TRADE UPDATES ARE TIMELY POSTED IN A SEPARATE REPORT IN THE MEMBER’S AREA. PLEASE SEE THAT DOCUMENT FOR A CURRENT REFLECTION ON ALL OPEN AND CLOSED TRADES SINCE THE SPREADSHEET UPDATES IMMEDIATELY AND WILL ALWAYS BE MORE CURRENT THAN THIS E-MAIL UPDATE. THANK YOU.
NOTE: PLEASE SEE MASTER TRADER GUIDELINES FOR TRADING THE OPEN AND GAPS IN MEMBER’S AREA FOR RULES ON TRADE ENTRY, GAPS, ETC.
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.
