Trading PlanChina currency manipulation, trade tariffs, an inverted yield curve, the Federal Reserve, and the next tweet have professional money managers and active investors sitting on a proverbial “razor's edge.”

Is the latest mild correction — similar to past ones — a buying opportunity that should not be missed, or is it the start of a larger correction similar to the one in 2018?

The 2018 correction measured by the S&P 500 and the NASDAQ 100 just missed the accepted bear market correction Mark of 20% by a couple of points.

Or maybe, it’s the “big one” like 2008 or 2000? There has not been a large correction like those since this bull market advance started in 2009. This is the longest bull market advance in history, so logically the big one must be due.

Maybe so, but logic often doesn’t prove to be a good decision or market timing guide.

 

Is it Different This Time?

Every yield curve inversion has preceded every downturn since the 1950s — except for one.

Could there be a better indication of what’s coming? It doesn’t seem so but could it be different this time?

One side believes that the trade tariffs and the inverted yield curve virtually guarantee a recession is coming.

The big ones in 2000 and 2008 were preceded by an inverted yield curve.

Another opinion is that the historic strong US economy can overcome the historic track record of the inverted yield curve.

 

If there was a guarantee of anything, there would not be opinions.

And if you own individual stocks, remember that these opinions are based on what the stock market will do over the intermediate-term.

Even during the mild corrections, individual stocks can experience a bear market correction of more than 20% — and many do.

Cisco Systems (CSCO), that is considered a “blue chip,” is down just over 20% from its July high and fell just over 10% last week.

The correction of 2008 that was not an official bear market took many stocks down between 20% and as much as 50%. Small caps went down 30% — some over 70%.

At this time, when the majorities sit on the razor's edge waiting for the Fed to make a big rate cut or a resolution to the trade tariffs, you better have a “line in the sand” – a money management plan in case this is the big one.

 

S&P Sector ETFs

 

 

In the S&P 500 sector list above, the majority of sectors ended the week with losses. However, those losses were reduced by buyers showing up on Friday.

Energy was the big loser again this week.  As you can see, it’s down almost 10% this month and almost 20% from its high this year.

On Wednesday, when the yield curve inverted measured by the 10-year versus the two-year, the Financials gapped lower but recovered some of that loss on Friday.

Consumer Discretionary, the third-worst loser on the week and down almost 10% from its July high, is another signal of growing concerns of a slowing economy. This ETF is used as a measure of consumer confidence since it is based on things bought, but not necessarily needed.

Consumer Staples, that was the biggest winner on the week, is signaling that money is moving into what is considered “recession-resistant.“ This ETF is based on the products and services that are needed.

Consumer Staples do well in a bull market too, but when it is out-performing Consumer Discretionary, that is viewed as a defensive move.

For the year, all sectors are still green but the Energy and Healthcare sectors are both close to turning negative.

The Technology ETF, which has been the biggest winner this year among the S&P sectors, saw a big crack in its armor when Cisco reported earnings and said its China sales have dropped significantly.

 

Where Are the Markets Headed This Week?

 

Last week a popular hedge fund manager said:  “It’s the toughest market in 20 years.”

And a well-known technical analyst said: “This is the most indecisive market he has ever seen.”

The majority of talk about corrections or indecision always revolves around the broader markets. So, where are the markets headed this week?

Based on Wednesday’s price action, which was a gap down below a bullish Wide Range Bar (+WRB) and plunge lower, that says the markets are going down.

However, Friday’s upside reversal, which took the broader markets and many back to or above Wednesday’s high, suggests at least some continued upside.

Friday's reversal still leaves current prices well below last week’s high, which needs to be overcome to signal a larger move to the upside.

So, in the short-term, last week’s high and low are the short-term reference points – and anything in between are only gyrations in a trading range.

A move below last week’s low would signal at least a move to the June low for the S&P 500 and the NASDAQ 100.

The Transportation Index and the Russell 2000 are already at their respective June lows so their downside may be limited in the short-term.  However, a close under their respective June lows will suggest a significant move lower.

 

The weekly chart structures in the broader markets and most sectors are nothing to get bullish about.

However, the retest and reversal pattern in the S&P 500 and, to a lesser degree in the NASDAQ 100, could be bought by nimble, experienced traders above Friday’s high — with a stop below last week’s low.

As mentioned, last week’s high will be a point of price resistance, and whether prices and get above that is an unknown.

If I could tell you with greater certainty of the outcome, I would.

This market has been more of a coin-flip from week to week than high probability situations.

More on this in the video below.

 

Dow Jones Industrials

 

 

 

Above is the chart of the Dow Jones Industrial Average that we review each week for information and education of MTS.

In last Monday’s letter, I pointed out that the Bottoming Tail (BT) that formed on Wednesday, August 7 was also a range expansion candle and strong reversal.

I also said that if the Dow could not get through the 50-MA (green line), the expectation would be for a retest of Wednesday’s BT area.

That is what happened last week and on Thursday another BT formed on the retest of last Wednesday’s reversal.

Friday’s follow-through to from last week Thursday’s retest and reversal of the prior BT got prices close to last Wednesday’s high.

As already mentioned, this leaves last week’s high (red line) and low (green line) as our short-term reference points of resistance and support.

Above last week’s high, is a void of price resistance until the old all-time highs.

Below last week’s low is a void of price support until the Major Support (MS)

The current pattern suggests that prices “should” move higher to at least last week’s high, which isn’t that far — and once there will see the reaction.

If the Dow can get above last week’s high, the 50-MA may be a stall point, but that moving average is not aligned with any price congestion to the left.

Master Trader Tip: only prices are real support and resistance, which makes moving averages subjective as one. However, some moving averages can become self-fulfilling reference points since so widely-followed by the masses. The 50- and 200-MAs are.

If the Dow cannot get through 26,200, turns lower, and below the retest and reversal pattern — look for a move to the June low and likely below.

Because this is a news-driven market, the possibility of a head-fake move is always in the thoughts of active managers and traders.

Stay tuned!

 

VIDEO REVIEW OF MARKETS AND INTERNALS

 

 

 

 

 

NEW STOCK TRADING IDEAS

 

Below is a daily chart of Fiserv, Inc. (FISV).

 

 

Trade:  Over $107.48, consider buying stock.

Technical Setup:   Bullish W-Bottom Breakout to all-time highs daily.

Stop Loss:  $101.98.

Optionable:  Yes, but illiquid.

 

Below is a daily chart of The Sherwin-Williams Company (SHW).

 

 

Trade:  Over $532.02, consider buying stock.

Technical Setup:  Breakout to all-time highs in bullish uptrend all time frames.

Stop Loss:  $514.76.

Optionable:  Yes, but illiquid.

 

Below is a daily chart of The J. M. Smucker Company (SJM).                .

 

 

Trade:  Over $115.14, consider buying stock.

Technical Setup:   Breakout from inverse head and shoulders at r200-MA daily.

Stop Loss:  $109.98.  Earnings 8/27.

Optionable:  Yes, but illiquid.

 

Below is a daily chart of Twitter, Inc. (TWTR).                                        .

 

 

Trade:  Over $41.25, consider buying stock.

Technical Setup:   Breakdown Failure on Support and 20-MA daily, bullish weekly.

Stop Loss:  $39.77

Optionable:  Yes, can buy $38 calls if like.

 

Below is a daily chart of Zoetis Inc. (ZTS).                                               .

 

 

Trade:  Over $125.60, consider buying stock.

Technical Setup:   Breakout above r20-MA daily, Bullish 1-2-3 weekly.

Stop Loss:  $121.48.

Optionable:  Yes, but illiquid.

 

Below is a daily chart of Tesla, Inc. (TSLA).

 

 

Trade:   Under $216.00, consider shorting stock.

Technical Setup:   Bearish consolidation after -WRB Breakdown in downtrend daily/weekly.

Stop Loss: $227.02.

Optionable:  Yes, but illiquid.

 

Below is a daily chart of Cirrus Logic, Inc. (CRUS).                                .

 

 

Trade:  Over $54.76, consider buying stock.

Technical Setup:   Breakout above r20-MA daily.

Stop Loss:  $51.88.

Optionable:  Yes, but illiquid.

 

8/19:  MLM – Over $255.67, consider buying stock.   Breakout to all-time highs after Pro Gap and +WRB Igniting on 7/30 daily. Stop Loss:  $242.77.  Optionable:  Yes, but illiquid.

 

 

NEW OPTION TRADING IDEAS

 

Below is a daily chart of General Mills, Inc. (GIS).

 

 

Trade:  Over $55.29, consider buying Sep. (9/20) $50/57.5 bull call debit spread (33 DTE) for mid-point (closed at $4.79/share which is giving positive time decay).

Technical Setup:  Gap Breakout from multi-week trading range daily/weekly.

Option Strategy:   Bull Call Debit Spread (BCDS).

Stop: $53.48.

 

Below is a daily chart of Starbucks Corporation (SBUX).

 

 

Trade:  Over $97.02, consider buying Aug (8/23) $92 (.89 Delta) calls (5 DTE) for mid-point (closed at $4.75/share).

Technical Setup:  Breakout from bullish consolidation above r20-MA in strong uptrend daily.

Option Strategy:   Long Calls (LC).

Stop Loss:  $94.18.

 

Below is a daily chart of Martin Marietta Materials, Inc. (MLM).

 

 

Trade:  Over $255.67, consider shorting Sep. (9/20) $240/220 bull put credit spread (33 DTE) for mid-point but limit of $1.10/share (closed at $1.22/share).

Technical Setup:  Breakout to all-time highs after Pro Gap and +WRB Igniting on 7/30 daily.

Option Strategy:   Bull Put Credit Spread (BPCS).

Stop Loss:  $242.77.

 

Below is a daily chart of Innovative Industrial Properties, Inc. (IIPR).

 

 

Trade:  Over $107.70, consider shorting Sep. (9/20) $90/80 bull put credit spread (33 DTE) for mid-point but limit of $1.00/share (closed at $1.20/share).

Technical Setup:  Breakout from trading range daily, Buy Setup weekly.

Option Strategy:   Bull Put Credit Spread (BPCS).

Stop Loss:  $99.62.

 

 

VIDEO ON OPEN TRADES AND ADJUSTMENTS (NOTE:  Also in Member's Area in Open/Closed Trade Sheet)

 

 

 

 

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.

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To invest in ETFs for weeks to months to generate wealth with compelling patterns using MTS, see  Master Trader ETF Investment Trader. Click HERE

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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.

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.