Trading PlanLast week was uneventful in the broader markets.

They continue to be in a corrective mode over the last month within the long-term uptrend.

The Dow was the star of the month as far as the broader markets go. And while we were expecting it to move up and make a new all-time high, it was playing catch-up to the others. I'll explain. 

In other words, it was under performing and then “joined the party.”

“Catch-up” is a strategy where the broader markets or stocks within a sector have been rising.

Those that have been showing relative strength (the strongest that are moving higher more than others) become extended and profit-taking begins.

Those weaker indices or stocks in the sector then play catch-up when money begins flowing into them.

It’s an excellent way to profit as money rotates from the stronger to the weaker.

However, it’s not just buying an under performer in a downtrend. Specific criteria together make a strategy of when to play catch up.

You can learn about strategies like Catch Up and others in our new Swing Trading Course that focuses on trades over a few days to a few weeks.

While the broader markets in most sectors “ran in place” last week as the rhetoric continued in Washington, a few sectors took it on the chin.

The Financial sector (XLF) and the Materials sector (XLB) had breakout failures from the prior week. The Regional Banks (KRE) broke down below their recent support.

And rising interest rates (TBT), which is at the top of a trading range now, took their toll on the Home Construction sector (ITB) and Homebuilders (XHB).

Technology (XLK) and Aerospace and Defense (XAR) have been holding up well and could still move higher.

Overall, there is nothing that screams out “come to pick up the money.”

Where the markets are headed this week?

The long-term trends in the broader markets are up, so the assumption is that will continue until a break below an area of Major Support (MS).

The S&P 500 and the Dow saw last week’s range trade inside of the prior week’s range so neutral there.

The Transports move below the new high low and that is a short-term bearish event but prices are still above price support.

The Russell 2000 has pulled back to its area of support and needs to get turned around here in the next week, which is what it should do.

The NASDAQ 100, after gapping down Monday morning near the bottom of its recent range, rallied the rest of the week to close to the top of the range. That move formed a bullish reversal week within its sideways consolidation.

Our market internals gauges aren’t giving us a signal either bullish or bearish.

At this time, we remain neutral to bullish without any expectations for a large move in either direction. Trade accordingly, which means, smaller positions.

 

Dow Jones Industrials

 

Above is the chart of the Dow Jones Industrial Average that we review each week.

Considering the week before last’s sharp advance higher and then ending that week with the gap up and narrow range day — and a new all-time high, it wasn’t a surprise to see the Dow retrace last week.

Thursday and Friday were consolidation days within Wednesday’s wider range red candle. Friday even traded inside of Thursday’s range, so prices went nowhere at week’s end.

Minor Support is in the 26,200 area and the rising 20-period moving average is in the same place.

If the Dow is going to move lower at the beginning of the week, the area between 26,200 and slightly below should be where buyers will show up.

A deeper move to the Major Support (MS) in the 25,800 area would certainly damage the look of this daily uptrend.

However, the 50-period moving average is in that same area and rising. So, that’s a strong reference point of support where buyers would certainly show up.

There’s nothing to suggest that prices will move down there at this time but I’m pointing out reference points to be aware of just in case. You never know.

To expect prices to move higher, we would have to see the Dow move above Thursday’s high for starters. Stay tuned!

 

Market Overview Video and Internals

 

NEW STOCK SWING TRADING IDEAS

 

Below is a daily chart of Technology Select Sector SPDR ETF (XLK).

 

 

Trade:  Over $75.40, consider buying the ETF.

Technical Setup:  Breakout from bullish ascending triangle consolidation above r20/50-MA with bullish engulfing bar daily, bullish weekly and monthly.

Stop Loss:  $73.95.

 

Below is a daily chart of Eli Lilly and Company (LLY).

 

 

Trade:  Over $107.74 consider buying stock.

Technical Setup:  Breakout from bullish consolidation above r20-MA with prior Bottoming Tails (BT) representing Breakdown Failures on the daily, bullish weekly and monthly.

Stop Loss:  $105.28.  Earnings 10/23.

 

Below is a daily chart of Cisco Systems, Inc. (CSCO).

 

 

Trade:  Over $48.80, consider buying stock.

Technical Setup:  Breakout and bullish consolidation above r20-MA with bullish engulfing bar daily, bullish weekly and monthly.

Stop Loss:  $47.78.

 

Below is a daily chart of SMART Global Holdings, Inc. (SGH).

 

 

Trade:   Under $28.60, consider shorting stock.

Technical Setup:   Breakdown daily/weekly in bearish downtrends daily and weekly.

Stop Loss:   $29.96.  Note:  Earnings 10/4 so exit by 10/3.

 

NEW OPTION TRADING IDEAS

 

Below is a daily chart of Intel Corporation (INTC).

 

 

Trade:  Over $47.44, consider buying ONE-THIRD of a stock position and shorting Oct (10/19) $49 calls (18 DTE).  Note that the premium lowers our cost basis and give us positive time decay income, and will be higher when triggers since stock higher.

Technical Setup:   +WRB engulfing on +Vol. setting a higher low on the daily, major support and Bottoming Tail on the weekly and monthly charts.

Option Strategy:   Covered Call (CC).

Stop Loss:  $44.05.  Note that this is a bottoming pattern so don’t expect quick results which is why we are starting with only a one-third position with a large stop.  Will advise when to add.  Earnings 10/25 but we are approaching as a core trade.

 

Below is a daily chart of Eli Lilly and Company (LLY).

 

 

Trade:  Over $107.74 consider shorting Oct (10/19) $105/100 bull put credit spread (18 DTE) for mid-point but limit of $.50/share (closed at $.55/share and note that a bit more illiquid).

Technical Setup:  Breakout from bullish consolidation above r20-MA with prior Bottoming Tails (BT) representing Breakdown Failures on the daily, bullish weekly and monthly.

Option Strategy:   Bull Put Credit Spread (BPCS).

Stop Loss:  $105.28.

 

Below is a daily chart of Target Corporation (TGT).

 

 

Trade:  Over $88.37, consider shorting Oct (10/19) $86/82 bull put credit spread (18 DTE) for mid-point but limit of $.46/share (closed at $.52/share).

Technical Setup:  Breakout from bullish consolidation on Major Support and above r20-MA after Breakout to all-time highs on the daily, bullish weekly.

Option Strategy:   Bull Put Credit Spread (BPCS).

Stop Loss:  $86.68.

 

Below is a daily chart of ETFMG Alternative Harvest ETF (MJ).

 

 

Trade:  Over $40.15, consider shorting Oct (10/19) $35/30 bull put credit spread (18 DTE) for mid-point but limit of $.60/share (closed at $.70/share).

Technical Setup:   Bullish consolidation on Support and above r20-MA on the daily chart, bullish weekly and monthly.

Option Strategy:   Bull Put Credit Spread (BPCS).

Stop Loss:  None for now since the short put is 12.8% OTM, if weakens we will consider legging into an iron condor.

 

Tune into this week’s Master Trader Live on 10/3/18 at 12 ET to discuss this hot topic:

Profit from Pot – Trading Stocks and Options in Cannabis Frenzy

 

 

VIDEO ON OPEN TRADES AND ADJUSTMENTS

 

 

 

 

Because your success is vital to you – and us.

Before selling options or credit spreads, we urge you to review the valuable and detailed information that we have provided for you in your Member’s Area.

You will find it by scrolling to the bottom of the page to Mastertrader Subscriber Resources.

The link is Money Management Considerations When Selling Option Credit Spreads for Income.

It explains Master Trader Money Management, Trade Management, understanding the use of Contingent Orders, and much more.

If You’re in a Rush to Start

A quick simplified approach to calculating contract size is to simply base your contract size based on the number of shares permitted in your Trading Plan as if you were trading the stock or ETF.

Simple Share Sizing = $ Risk / Stop Loss

The amount of money that you are willing to risk – divided by – the stop loss amount. For example, $100 / .20 = 500 shares

Credit Spread example, if your Trading Plan allowed you to trade 543 shares of AAPL based on the stop loss, then simply round down to the nearest hundred and short an equivalent number of contracts of the option.

Since 1 contract represents 100 shares of the underlying, this would be five (5) contracts.

 

Thank you for being a loyal subscriber and feel to email us with any questions or comments on anything.

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Master Trader and You Building Your Financial Future Together!

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
Trading the Pristine Method — Origin and End

Dan Gibby
Chief Options Strategist

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Twitter: @GregCapra
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NOTE:  Master Trader will show opening and closing prices of all stock and options trades.  We recommend that all traders and investors use proper share sizing for positions and money management. However, we cannot recommend what that is for your particular trading style, risk tolerance, or account balance.

We urge you to calculate your own share/position size based on your individualized risk parameters, Trading Plan, and familiarity with the proposed trade strategy and risk. Advanced Management Strategies (AMS) covers in detail foundational and advanced position and money management.

 

NOTE:  Master Trader and its representatives may have existing positions in actual or other trade recommendations before or after suggested herein.  Additionally, we may manage them differently for internal purposes based on different risk parameters than noted herein.

All trade ideas and content are for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, option or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds.  Investment or trading information provided may not be appropriate for all investors, and is provided without respect to individual financial sophistication, financial situation, investing time horizon or risk tolerance. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request.  Master Trader Consulting, Inc. is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardize Options and the Risk Disclosure for Futures and Options found here:  CLICK HERE.