At the end of January, we started to become concerned with the broader market’s ability to continue this advance without some corrective action.
Bearish sentiment had reached what I referred to as “nosebleed territory,” which is bearish. And breadth was not confirming the price move higher — both in alignment for caution for the bulls. And the shortest end of the yield curve was beginning to invert, another caution for bulls!
At the same time, news of the coronavirus was starting to be talked about in the news media. Since then, speculation about this virus spreading and causing a slowdown in economies around the world, helped to cause volatile gyrations day-to-day.
In prior letters, I explained about these gyrations and the self-correcting uptrend — along with our cautionary market internals — which flagged a big caution for the bulls. However, that didn’t stop the market from grinding higher.
In Wednesday’s mornings pre-market commentary in the Green Trading Room — and on YouTube, I explained that the prior several days going sideways supported the gap up that morning and the markets should advance.
I also explained that if they didn’t, that was a problem for bulls — and why.
Well, the markets held up after the gap up and advanced slightly, but then ended the day not far from its opening price.
After a several days resting period and a gap higher above it, the markets may see a slight amount of profit-taking from overnight holders selling. However, typically that type of price pattern continues higher after that short-term selling.
When the majority of broader markets gapped below Wednesday’s low on Thursday, that was a bearish event that set the stage for prices moving lower.
“New High Failure (NFT)” patterns are one of our favorite “Shock Patterns.”
They didn’t do it immediately; however, they first moved higher into Wednesday’s range.
That is where we shorted the S&P 500 Futures and the SPY ETF in the Green Trading Room.
To say that we were surprised by the speed and extent of the move lower is an understatement. Also was surprising was the level retracement off of the low.
That left a large Bottoming Tail bar at Thursday’s close, which suggested the possibility that the markets could continue to move higher to new all-time highs again! It seemed crazy, but we’re chart readers, and a large Bottoming Tail bar says that buyers stepped up in a big way.
Well, Mr. Schizophrenic was “in the house again.” The broader markets gapped lower Friday morning which, after Thursday’s rally off of the low and BT, had to of had long traders in disbelief.
The broader markets fell sharply back down to Thursday’s low. Wow!
The move down was fast, so we waited to see if it could retrace. Shortly after noon ET, a Breakout Failure occurred, and we shorted the NASDAQ 100 Futures in the QQQ ETF in the Green Room.
Some subscribers in the room bought put options — one more “home run trade.”
S&P Sector ETFs
Real estate, which was last week’s top performer with almost 5% gain last week, eked out a marginal gain again this week.
Utilities also interest-rate sensitive were down a slight amount.
After last week’s drop in intermediate-term interest rates (view the ETF symbol TBT), these two ETFs should have been higher. So, it seems they’re getting tired.
The Technology ETF was the biggest loser, but the change in the week doesn’t tell the real story. The change from the gap higher and Wednesday’s close was just over 3.25%.
The Communication Services Sector was also down an additional 1% based on Wednesday’s close to Friday’s close.
The most damage the was done – and what has been the biggest winners, which has been in technology. And within the technology sector, Semiconductors led the way lower.
In the February 3rd Advisory letter, I pointed out that Semiconductors one of the worst-hit among all sectors, and that was confirming a correction underway.
The selling was relatively broad-based. But other than intraday, the selling based on the daily time frame wasn’t what signals a correction is over.
Where Are the Markets Headed This Week?
Many of the broader markets and sectors that we track are still in uptrends in Multiple Time Frames (MTF).
However, corrections start in lower time frames and evolve into higher ones.
While we don’t know with 100% certainty how far correction will go, we do have an objective method for monitoring what is happening across those MTF and our market internals.
As already mentioned, our market internals forewarned us of increasing risk at the end of January, and the price action last week isn’t a surprise.
I mentioned in last week’s video that the current environment was susceptible to “accidents,” and last week was an example.
It’s becoming clear that the coronavirus isn’t a common cold or bad flu, and institutions are fearful of holding their extended positions.
We say that extended can become more extended, but when extended reaches beyond what is a historical extension, institutions look for a reason to sell.
I pointed this out in last week’s Monday letter that the NASDAQ 100 was 7.75% above its 50-day moving average.
Historically, the markets don’t look “dangerous: at a new high based on the bullish price action. That’s why we use the market internal gauges that we do and objective measurements of the past to give us clues of impending danger.
Another concern for the broader markets is the narrowing or inverted yield curves, which happened last week, signaling “recession fears” in the future.
The same occurred at the beginning of the summer in 2019, and it was followed by several months of sideways choppy price action.
We may be in for more of the same now, or the markets may decline this time through either a correction or downward price action, versus a sideways one.
There is no way to know, but we do know is that this correction is not over.
Dow Jones Industrials
Above is the chart of the Dow Jones Industrial Average that we review each week for information and education of MTS.
Last Tuesday, when the markets opened, the Dow gapped lower like other markets but failed to come back like the S&P 500, and the NASDAQ 100 did.
The Dow continued to show relative weakness and didn’t come close to making a new all-time high when the S&P 500 and the NASDAQ 100 did on Wednesday.
That fact was not a reason to doubt those new all-time highs since the Dow has been showing relative weakness all along compared to those indices.
The size of Thursday’s Bottoming Tail (BT) was a surprise after the drop that happened. But as you can see, buyers stepped up exactly at the support area marked in last week’s letter.
We cannot say it enough, “Look to the Left” for where support (buyers) and resistance (sellers) are.
Master Trader Tip: Trendlines and Fibonacci lines are not support and resistance!
Friday, the selling continued and broke under the prior Pivot Low (PL), which was also Major Support (MS), because of the higher high that occurred after the PL.
The 50-day moving average is just below at 28,800 and a reference point that institutions will be focused on next week to see if it holds.
We will look at other reference points in the video below.
VIDEO REVIEW OF MARKETS AND INTERNALS
[s3mm type=”video” source=”cloudfront” cfurl=”dar5o8cgblg7k.cloudfront.net” files=”feb-letter-2020/BroaderMarkets_2_24_20.mp4″ /]
Click Image to Learn More
NEW STOCK TRADING IDEAS
2/24: DGX – Over $113.68, consider buying stock. Bottoming Tails after Breakout daily, bullish weekly. Stop $111.48.
2/24: PH – Over $215.94, consider buying stock. Bullish +123 Continuation Breakout to all-time highs daily. Stop $208.25.
2/24: CAH – Over $60.53, consider buying stock. Bullish +123 Continuation Breakout daily/weekly. Stop $58.65.
2/24: GILD – Consider buying stock as a core long around current levels of $69.70 or on pull backs. Earnings 5/7. Breakout daily, weekly, monthly. Stop $66.80.
KDP – We will watch for a long entry on an intra-day pull back and advise:
NEW OPTION TRADING IDEAS
2/24: INFO – Under $78.90, buying Mar (3/20) $80 puts for mid-point (closed at $2.10/share). Breakdown daily, extended weekly/monthly. Stop $80.62.
2/24: AVY – Under $133.45, shorting Mar (3/20) $140/145 bear call credit spread for a limit of $.70/share (closed at $.75/share). Breakdown after Breakout Failure daily. Stop $138.12.
2/24: WU – Under $25,56, buying Mar (3/20) $27 puts for mid-point. Breakdown daily/weekly, Climactic Sell Setup monthly. Stop $26.61.
2/24: TMO – Under $333.00, shorting Mar (3/20) $350/360 bear call credit spread for a limit of $1.25/share (closed at $1.37/share). Breakdown from Major Resistance daily/weekly. Stop $341.52.
2/24: VSTM – Over $2.19, buying Mar (3/20) $2 calls for $.35/share and Mar (3/20) $3 calls for $.05/share. Breakout all time frames with huge price void. Earnings 3/10 so we plan on holding with no Stop and hoping for a huge move to make huge ROC on low priced call options on volatility biotech stock.
VIDEO ON OPEN TRADES AND ADJUSTMENTS (NOTE: Also in Member’s Area in Open/Closed Trade Sheet)
[s3mm type=”video” source=”cloudfront” cfurl=”dar5o8cgblg7k.cloudfront.net” files=”dans-video/advisory trade update video 200223.mp4″ titles=”advisory 200223″ /]
Options Strategies Definitions Videos Here
Please read the information on Money Management below
Learn how Master Trader Technical Strategies – MTS and MTS with Options Strategies can make consistent money.
Click Here – to Access the Options Credit Spread Program that puts you on the Master Trader Income Path.
Click Here to Learn The Master Trader Swing Trading Strategies to profits over a few days to weeks.
To invest in ETFs for weeks to months to generate wealth with compelling patterns using MTS, see Master Trader ETF Investment Trader. Click HERE
Master Trader Weekly Lessons for Investors and Traders will build your investing and trading knowledge and confidence to profit in all markets! Each lesson can change your financial future — only $11.97/month! Click HERE
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.
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.
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
Dan Gibby
Chief Options Strategist
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.