In last Monday’s letter, I was expecting the broader markets to take a stand, hold their current support levels, and move up early in the week.
The prior week, prices had moved lower and closed near the lows of that week. That created a red candle (close below the open) in the weekly time frame.
Considering that red candle at the time — that could have resulted in prices moving lower, I suggested that the red bar (candle) should be ignored.
When I say ignored, it isn’t to mean that we should not recognize it as a bearish event. What I said was that, in an uptrend, red bars being ignored are normal.
Last Wednesday, during the Master Trader Live event where Dan and I discussed the use of Multiple Time Frames (MTF), it was explained that in a time frame lower than the one where the red bar has formed (the higher time frame), the transition from the red bar to the green bar can be seen.
If you missed Wednesday’s event or the replay, here is the link.
We discussed many excellent concepts related to MTF and price patterns.
Where Are The Markets Headed This Week?
By the end of last week, the broader markets did ignore the prior week’s red bar on the weekly time frame.
Some markets moved more than others and, surprisingly, the Dow Industrials weekly chart looks the most convincing to move higher.
I’ll explain why when we get to a review of the Dow.
The S&P 500 on the weekly time frame looks the second best as to its ability to ignore the red bar.
The NASDAQ 100 was less impressive because it was unable to completely negate its red candle; however, that red candle was quite a bit larger than the other broader market indices.
The Russell 2000 was the least impressive, and actually not impressive at all. It was unable to retrace past the 50% mark of its red candle.
Of the broader market indices that we review, the Transportation Index did not have a red candle that prior week, but did have three Topping Tails (TT).
Those three TTs that proceeded last week’s trading in the Transports were suggesting lower prices, especially since they were occurring at the prior high.
Rather than move lower, prices gapped higher near the highs of those TTs and continued to move up. By week’s end, the Transports closed at an all-time high.
What could turn us bearish in the short term?
In the letter on August 27th, I wrote: “The Dow and the Transportation Index moving to new all-time highs and the “wrong-way” options traders making big bullish bets at the same time.
When and if that happens, we will sound the warning bells. Stay tuned.”
That has not occurred yet but it looks like it’s a strong possibility that it’s going to.
The Transports have already made a new all-time high. The Dow Industrials look poised to move higher based on last week’s price action. And the market internal gauges that we monitor gave a bullish signal early last week.
So, the alignments of these at this time are pointing to the probability of what I wrote on August 27 coming together may happen.
Dow Jones Industrials
Above is the chart of the Dow Jones Industrial Average that we review each week.
The beginning of the week started off with a bearish close on Monday, where we said to expect lower prices on Tuesday.
On Tuesday at one point, it looked like the Dow was headed down toward the Major Support (MS) level at 25,600.
But after about 15 minutes of what started off as panic selling at the open, the panic was over and buyers stepped up aggressively again.
By the end of the day on Tuesday, buyers had taken full control — yet again — and we had a large green candle that almost engulfed Monday’s red one. Very bullish!
The Dow moved higher over the next three days and while it was only able to move slightly higher on Friday, it closed above the prior recent swing high.
Last week’s move up above that prior high has now formed a new reference point of MS just below 25,800.
Ideally, any pullback this week will stay above 26,000 on a closing basis.
The more bullish scenario would be that the Dow never takes out Friday’s low and moves above its high to attack the prior all-time high. Stay tuned!
Dow Jones Industrials Weekly Chart
Above is the weekly chart of the Dow Jones Industrial average.
Prices had cleared the more recent resistance from the middle of the year and now look headed toward the all-time high that occurred in January of this year.
Long-term subscribers will remember the warnings that we gave right after that high point in the Advisory Letter at the time and why.
For those of you that are relatively new to the Master Trader Market Edge Advisory Letter, here are links to the letters at the time of that high and this link is the week following.
The Dow has been consolidating its recent gain the last three weeks. Last week’s price action on the weekly time frame suggests that that consolidation is over.
Notice that the current candlestick shown traded below the prior two weekly lows. It then rallied to the top of the two prior week’s highs and closed above both of the prior closing values. So, there is a new weekly high after breaking the lows.
Master Trader Tip: If the candle that breaks the prior candle’s lows rallies back to the highs of those candles — in the time frame being viewed within an uptrend — it signals the continuation of the uptrend.
The confirmation of the signal happens when prices trade above the reversal candle’s high with a stop loss placed under that candle’s low.
As bullish as the signal is with an uptrend as a continuation, it’s never a guarantee that it will happen. That’s why we always have a stop loss.
The confirmation or trigger of the continuation does not have to happen on the next candle, but it should happen on the one after that, at the latest.
Assuming that the Dow follows through — and prices can make a new all-time high, the August 27th letter scenario of new all-time highs for the Dow Industrials, Transports and the alignment of our market internal gauges signaling a warning a correction will be complete.
Market Overview Video
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NEW STOCK SWING TRADING IDEAS
Below is a daily chart of C.H. Robinson Worldwide, Inc. (CHRW).
Trade: Over $100.54, consider buying stock (note: ITM calls are too spready for consideration).
Technical Setup: Master Trader Buy Setup with a bullish engulfing bar above r20-MA daily, bullish weekly and monthly, strong sector. Note: the 8/21 gap down bar is not real.
Stop Loss: Half under $98 and a half under $96.
Below is a daily chart of Kimberly-Clark Corporation (KMB).
Trade: Over $116.50, consider buying stock (note: ITM calls are too spready for consideration).
Technical Setup: Breakout from bullish consolidation at 20-MA daily, Master Trader Buy Setup with Bottoming Tail on the weekly.
Stop Loss: $114.38.
NEW OPTIONS TRADING IDEAS
Below is a daily chart of C.H. Robinson Worldwide, Inc. (CHRW).
Trade: Over $100.54, consider shorting Oct (10/19) $95/90 bull put credit spread (32 DTE) for a limit of $.46/share (closed at $.52/share).
Technical Setup: Master Trader Buy Setup with a bullish engulfing bar above r20-MA daily, bullish weekly and monthly, strong sector. Note: the 8/21 gap down bar is not real.
Option Strategy: Bull Put Credit Spread (BPCS).
Stop Loss: $95.28.
Below is a daily chart of SPDR S&P 500 ETF (SPY).
Trade: Over $291.27, consider shorting Sep (9/28) $289/279 bull put credit spread (12 DTE) for a limit of $.80/share (closed at $.90/share).
Technical Setup: Breakout from 2-day consolidation and Bottoming Tail after gap breakout from Buy Setup on Support and r20-MA daily, bullish and monthly.
Option Strategy: Bull Put Credit Spread (BPCS).
Stop Loss: $288.55.
Below is a daily chart of PowerShares QQQ ETF (QQQ).
Trade: Over $184.95, consider shorting Sep (9/21) $183/178 bull put credit spread (5 DTE) for a limit of $.60/share (closed at $.72/share).
Technical Setup: Breakout from 3-day consolidation after breakout from Buy Setup on Support and r50-MA daily, bullish and monthly.
Option Strategy: Bull Put Credit Spread (BPCS).
Stop Loss: $183.18.
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.
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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.
