In last Monday’s letter I said, “Overall, there is nothing that screams out “come pick up the money.”
I also said that the markets continued to be in a corrective mode — and that continues to be the case.
However, if there was a sign from the markets that said, “get the hell out of the way, big trouble ahead,” I didn’t see it.
Was I asleep on the job or just not paying attention to the warning signs that were apparent? Not at all, just the opposite.
I review the broader markets, sectors and market internals on a daily basis.
And while the corrective mode the markets were in was clear, and I told you in last Monday’s letter to “trade accordingly, which means, smaller positions.” The size of the move in two days (Thursday and Friday) was not in the tea leaves.
The cause for this abrupt correction is blamed on the increase in interest rates, but interest rates have been rising since the beginning of September.
They actually reached the top of the trading range the week before last and I mentioned that it had taken its toll on Homebuilders and Home construction stocks.
On Wednesday, long-term interest rates decisively broke out of their trading range to the upside. There was no uncertainty about the move since it ended the day well above the range and with a Bullish Wide Range Bar (+WRB).
When my alert occurred at the start of the breakout intraday, I immediately looked at what the broader markets were doing in response.
They were trending in a tight sideways range and, surprisingly, there was no reaction — not until about 2:30 ET, where they started to retrace a bit, which is typically near the latter part of the day when markets are unable to break out of a range.
By the day’s end, it was another narrow range consolidation day, and even the weak Russell 2000 Index, was able to close with a green reversal day.
Chart of SPY – TBT
On Thursday, most of the broader markets opened lower and continued to move so throughout the day. It was as if every fund manager looked at the interest rate chart on Wednesday night and asked, “Maybe this isn’t a good thing?”
The selling continued on Friday and we have bearish weekly candles.
Where Are the Markets Headed This Week?
There was a lot of damage done to the short-term trends in multiple sectors in the broader markets.
Trend Matrix From the ETF Letter
Above it the Trend Matrix from the ETF Investment Trader Letter that covers the broader markets and sector trends in multiple time frames.
The stars signal that there has been a change from the prior week. As you can see, there were many changes — and the majority were negative.
The only positive change was in TBT, the short 20+ year Treasury (higher interest rates) ETF.
This will continue to make short-term trading opportunities more difficult to find.
However, as this ongoing correction continues to unfold, it is going to present some fantastic opportunities to make money. Every correction does!
For product and subscription information to this incredible service, please see ETF Investment Trader, Click HERE.
The market internal gauges that I have been using for decades have never failed to provide a “heads up” of a buying opportunity.
They are not telling us that “opportunity is now.” Rather, the sentiment gauge that has been neutral continues to be — and that supports that further downside is possible.
It’s likely that you incurred some losses last week and, hopefully, they were “calculated losses” that did not do much damage.
The bottom of every Monday letter provides guidance about money management as it relates to trading credit spreads and extensive documentation about that which is in your Member’s Area under “Resources.” If you haven’t read it, please do now!
Change your Trading and Your Financial Future Forever!
In different letters, we talk about our Advanced Money Management Strategies course.
This course can change your trading tremendously and I’m going to offer to you — for FREE — with the purchase of the Swing Trading Strategies course.
Either of these courses can change your financial future. Take this no-brainer opportunity to take the two of them for the price of one!
Once you have purchased the Swing Trading Strategies course, email greg@mastertrader.com and you will be provided with access to the Position and Money Management course for FREE.
Dow Jones Industrials
Above is the chart of the Dow Jones Industrial Average that we review each week.
The above chart does not give a true picture of the price action that occurred last week in most markets and sectors.
The Dow did play “Catch Up” as explained in last Monday’s letter. In doing so, it was outperforming other markets.
The new all-time high that was made on Wednesday ended with a Topping Tail (TT) day. And while a TT does signal that buyers lost control on that day, a TT within an uptrend does not signal the extent of the pullback that was.
That pullback moved all the way down to the new Major Support (MS), and that is never a good sign in the short-term.
As you can see, the 20- and 50-period moving averages are still rising; however, the depth of the pullback to MS always puts the trend in question.
The Minor Support (mS) is just below in the 26,200 area and we will see if that level can hold this week.
If it doesn’t, it’s likely to see prices move down to the area of the 50-day moving average (green moving average) below. Stay Tuned!
VIDEO REVIEW OF MARKETS AND INTERNALS
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NEW STOCK TRADING IDEAS
Below is a daily chart of Altria Group, Inc. (MO).
Trade: Over $62.23, consider buying stock.
Technical Setup: Bullish engulfing Breakout from consolidation at r50-MA on the daily, bullish engulfing in uptrend on the weekly.
Stop Loss: $59.98. Earnings 10/25.
NEW OPTION TRADING IDEAS
None at this time because of the broader markets discussed above.
VIDEO ON OPEN TRADES AND ADJUSTMENTS
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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 Master Trader 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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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.
