My cautionary commentary from last week was well timed. We hope you heeded the warning and did not suffer any significant losses in the drop. The initial gap down was followed by three days of chop and then the big drop.
And while the broader markets were ripe for a pullback as reviewed last week, a one-day drop of that extent was not expected. Why did it happen?
We know that the markets were extended and that prices accelerated higher in January — which set up the high probability of a pullback, which is normal. We also know that sentiment became too bullish in the middle of January.
Why such a big drop in one day? Well, according to the jobs report that showed a pickup in wage growth, it seems people are making too much money. Hum…, the markets don’t like you to make too much money!
This sent intermediate-term interest rates moving higher, which was no surprise to us since we’ve been saying that was coming, and have profited from it — and they are going to go even higher from here.
This is what is supposed to happen; if they did not, the probability of a yield curve inversion would increase. Historically, when the yield curve inverts, a bear market follows — not a normal bull market correction.
Over the last two years, three-month yields have moved up from near zero to about 1.45% as of last week. 10-year yields were at about the same level just prior to the presidential election, but have been advancing since. As of last week, they moved up to 2.85%.
While these higher intermediate- to long-term yields moving up has got the market jittery in the short term, if they didn’t move up, there would be more than short-term jitters.
Let’s look at where things are at and where they may go.
DOW JONES INDUSTRIAL AVG.
The first reference point is that small consolidation where the Bottoming Tail (BT) is marked. It seems inconceivable that this level would not be tested at a minimum. A gap down to that level at the open could be a short-term long trade for day traders (and weekly put sellers like us) that have a plan to do so. As you can see, a move to that area, which is about 25,300, would be a drop of 4.72% from the high.
The next reference point below is the rising 50-day moving average (green line), which would be a drop of 5.94%. As Master Traders, we always look to the left of a moving average to see if it is aligned with an area of price congestion or a pivot.
As you can see, there’s nothing there; however, the 50-day moving average is widely followed by institutions as a reference point to buy — but that is in an uptrend.
The last reference point as a downside “possible target” would be the Major Support (MS), which would be a 6.97% drop from the high.
From my point of view, that area between the 50MA and Major Support would be an ideal retracement point for prices to stabilize.
There are other reference points below, but there is really no point to discuss them at this time until we get more information. I’ll mention one anyway: a 10% correction would put the Dow edging just under 24,000 and the next Major Support area below.
I suggest that you set alerts at these levels and let your computer monitor them. In the video of trends and internals, I will also provide you another reference point to be aware of that can signal a market turning point.
BROADER MARKETS
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TREND MATRIX AND INTERNALS
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The CBOE Volatility Index (VIX) is also a Sentiment Gauge
Set an alert at the VIX prior high area
NOTE: Because of Friday’s large selloff, finding low risk trading opportunities was harder than normal because the stops need to be so large. Stay tuned for intra-day updates and we will notify subscribers when we believe a short-term bounce is coming.
Swing Trades:
Below is a daily chart of H&R Block, Inc. (HRB).
Trade: Under $25.45, consider shorting stock.
Technical Setup: Breakdown daily and weekly after failed breakouts (Topping Tails).Stop Loss: $26.73. Note: Earnings 3/6.
Below is a daily chart of Five Below, Inc. (FIVE).
Trade #1: Provided it does not open above $63.50, then consider shorting stock under the 10-Min. low.
Trade #2: Provided it does not open above $63.50, consider shorting Feb (2/16) $65/70 bear call credit spread (12 DTE) at mid-point but limit of $.75/share (closed at $.80/share). Note: This trade has a higher probability of profit than short stock but the gain is limited to premium received.
Technical Setup: -WRB Breakdown from huge bearish Head and Shoulders daily and weekly, Climactic Sell Setup and Topping Tail monthly.
Option Strategy: Bear Call Credit Spread (BCS).
Stop Loss: $65.32.
Below is a daily chart of Capital One Financial Corporation (COF).
Trade: Provided it does not open over $102.35, consider shorting stock under 10-min. low and selling Feb (2/16) $99 puts (5 DTE) at mid-point (puts closed at $.62/share).
Technical Setup: -WRB Breakdown from rounding top daily.
Option Strategy: Covered Put (CP).
Stop Loss: $104.89.
Trade Watch Ideas:
Below is a daily chart of Chevron Corporation (CVX), with the Implied Volatility Rank (IVR) below.
With an IVR of 99% and on Major Support, we will be watching for a Bull Put Credit Spread (BPS).
Below is a daily chart of PowerShares QQQ ETF (QQQ).
Gap Breakdown after Breakout Failure, overbought markets, we will be watching to short Bear Call Credit Spread (BPS) with its 100% IVR.
Below is a daily chart of ProShares Ultra VIX Short-Term Futures (UVXY).
As discussed in yesterday’s Video Chart of The Week, with a continued market sell off, we will be looking to sell an OTM weekly Bear Call Credit Spread (BCS) with its 100% IVR (possibly UVXY will move up and stall at the higher resistance area around $18, then we will look for bullish reversal in SPY).
See: https://mastertrader.com/video-profit-volatility-spikes-market-selloffs/
Below is a monthly chart of Navigator Holdings Ltd. (NVGS).
+WRB Breakout all time frames, HH/HL monthly, will watch for core long entry.
Miscellaneous Member Documents and Reminders:
Adjustments and Comments on Open and Closed trades in Master Trader’s Market Edge Advisory Letter. Note: Our Trade Updates are timely posted in a separate Report in the Member’s Area. Please CLICK HERE to see that document for a current reflection on all Open and Closed Trades since the spreadsheet updates immediately and will always be more current than this e-mail update.
Please see Master Trader Guidelines for Trading the Open and Gaps in Member’s Area for rules on trade entry, gaps, etc.
Below is a link to individual videos explaining in greater detail the definitions of the main option trading strategies used by Master Trader in its advisory letters to generate wealth and income.
Description of Master Trader Directional and Income Option Trades can be seen HERE
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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
Pristine’s Founder and Creator of the Pristine Method
Dan Gibby
Chief Options Strategist
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