Only 15 days ago in the October 1st Advisory letter, I said, “last week was uneventful in the broader markets.” That certainly was not the case last week.
In retrospect, it was the “calm before the storm.”
What followed was the Dow Jones Industrials moving up to a new all-time high, the S&P 500 and NASDAQ 100 just falling slightly short of doing the same — then.
Knowing that the markets were in an odd type of corrective mode, I said to “trade accordingly,” which means, smaller positions.
While I certainly wasn’t expecting what was to unfold to the downside, the advice was timely.
On October 3rd, as if there was or could have been an orchestrated plan to suck in many bulls at the worst possible time, the Dow pushed up to a new all-time high.
While this was happening, behind the cheers of the new all-time highs, the bond market was collapsing and yields were rocketing higher.
This apparent complacency to the higher yields was confusing to me, but the next day the coming carnage that was to come began relatively slowly.
By the end of the week before last, it was apparent to all that the broader markets were in trouble and the odds were high that more selling was to come.
However, with the beginning of last week starting with stabilization, the speed and extent of the selling that followed was surprising.
The broader markets and sectors stabilized by last week’s end, but there was nowhere to hide from last week selling.
The declines last week ranged anywhere from almost 2% to as much as almost 7%. And from that October 1st apparent calm before the storm, the NASDAQ composite is down almost 9%, NASDAQ 100 almost 8%, the Transportation Index 7 ½%, and the S&P 500 almost 5%. The Russell 2000 is down 11% from its high.
The flight to quality to Bonds that typically occurs during a market decline was not happening and that is the last place money is going into lately.
There was a slight relief move to the upside, but Bond ETF symbol TLT is down 12% from the December 2017 high — and 17% from the July 2016 high.
There is no doubt that the vertical drop in equities from the recent high caught the majority’s by surprise — including us — when the fire bell went off.
It’s likely that the only individuals that saw the top before it happened were those that have been calling for the top for about six years now.
The others are the marketers that will sell you their latest indicator package.
Where Are the Markets Headed This Week?
Vertical drops like the ones seen over the last several days historically do not result in an immediate move back up to the highs.
Of the 28 broader markets and sector ETF’s that are tracked in the ETF newsletter, 25 are in daily downtrends as of last week.
Gold and Gold Miners turned up on the daily timeframe although down on the monthly and weekly time frames so, a short-term bounce or the start of the new uptrend began last week.
Bond yields are the only ETF (TBT) that is in an uptrend on the monthly, weekly and daily timeframe.
What is happening now is that there is a real fear of inflation. Bond yields breaking out of multiple-year trading range and Gold and Gold Mining stocks having their best week in a long time are signs of inflation fears.
President Trump said last week that the Fed is crazy and “out of control” and that added to those inflation fears.
The assumption by market decline last week is that his remarks will influence the Fed and they will not control inflation by raising short-term interest rates further, we shall see.
In any event, the bond market has been moving up short-term interest rates ($IRX) for a couple of years now.
And if this bull market in stocks is going to hold together long-term (avoid a big bear market), the recent continued move higher in long-term interest rates is exactly what is needed to happen to avoid an inverted yield curve.
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Dow Jones Industrials
Above is the chart of the Dow Jones Industrial Average that we review each week.
At the end of the week before last, the Dow was in an uptrend but had a deep retracement down to the 9/29 Major Support low.
Master Trader Tip: Retracements back down to Major Support in an uptrend will put that uptrend in question. Strong uptrends do not pull back to Major Support.
On Monday, prices formed a Bottoming Tail (BT), which was a sign of buyers trying to take back control at that support level.
On Tuesday, prices continued to stabilize but were unable to close above their opening price. That is uncommon after a deep retracement and signaled further stabilization.
However, when prices broke below the low of the BT, stops were triggered and that selling triggered more selling.
The selling sliced through the 50-MA — and prices continued lower until they reached the next area of Major Support in the 200-MA area.
On Friday, the morning gap higher was sold into and, after stabilizing in the area of Thursday’s low during midday, buyers showed up at the 3 o’clock ET reversal time.
Friday ended with a Bottoming Tail at Major Support; however, this happening after the two-day vertical drop to the downside.
This scenario, historically, does not result in a significant move to the upside before another drop occurs.
Since our market internal gauges have reached a bullish extreme, a much better scenario would be for the markets to actually drop again early in the week.
A test of these lows and recovery would be a scenario we would be willing to take is a short-term trade on the long side.
That being said, the expectation for new highs anytime soon doesn’t exist.
It’s going to take some time to repair this damage, so have your expectations in alignment with what is. Stay tuned!
VIDEO REVIEW OF MARKETS AND INTERNALS
NEW STOCK TRADING IDEAS
Below is a daily chart of Conagra Brands, Inc. (CAG).
Trade: Under $34.82, consider shorting the stock.
Technical Setup: If triggers, will be failed reversal bar after Sell Setup at resistance from Pro Gap breakdown on the daily.
Stop Loss: $35.70.
SAIL daily/weekly – We have on watch list:
MMNFF – Another bullish cannabis stock we will be watching on a pull back.
NEW OPTION TRADING IDEAS
Below is a daily chart of Walmart Inc. (WMT).
VIDEO LESSON ON TRADE:
Trade: Over $95.17, consider shorting Oct (10/19) $93/90 bull put credit spread (5 DTE) for mid-point but limit of $.50/share (closed at $.61/share). This would return an impressive 20% ROC ($.50/2.50) if expires worthless.
Technical Setup: Pullback to Major Support and Bottoming Tail after +Gap Breakout on the daily, bullish consolidation in top half of +WRB weekly, showing great relative strength to the broader markets and XRT sector.
Option Strategy: Bull Put Credit Spread (BPCS).
Stop Loss: $92.98.
Below is a daily chart of The Clorox Company (CLX).
Trade: Under $142.00, consider shorting Oct (10/26) $150/155 bear call credit spread (12 DTE) for mid-point but limit of $.60/share (closed at $.70/share).
Technical Setup: Bearish -123 Continuation after breakdown daily.
Option Strategy: Bear Call Credit Spread (BCCS).
Stop Loss: $150.02.
Below is a daily chart of ETFMG Alternative Harvest ETF (MJ).
Trade: Over $40.00, consider shorting Nov (11/16) $34/29 bull put credit spread (32 DTE) for mid-point but limit of $.95/share (closed at $1.05/share).
Technical Setup: Breakout above r20-MA after Breakdown Failure on the daily.
Option Strategy: Bull Put Credit Spread (BPCS).
Stop Loss: $35.88.
Below is a daily chart of Foot Locker, Inc. (FL).
Trade: Over $49.83, consider shorting Nov (11/16) $46/42 bull put credit spread (32 DTE) for mid-point but limit of $.66/share (closed at $.72/share).
Technical Setup: Bullish trading range daily and weekly, showing great relative strength to the broader markets and XRT sector.
Option Strategy: Bull Put Credit Spread (BPCS).
Stop Loss: $46.98. Earnings 11/15 so exit before then.
IYT daily/weekly – We will be watching to sell a bull put credit spread with high volatility.
VIDEO ON OPEN AND CLOSED TRADES AND ADJUSTMENTS
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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.
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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.