We are headed into a monster week of news, Master Traders. There are roughly 2,400 companies reporting earnings this week! There is also the typical economic event reports – and, on Wednesday, the FOMC Rate Decision at 2 PM Eastern. And there’s always the possibility of the political jargon that seems to be a shattering event to the markets for all of about five minutes.
With so many companies reporting earnings this week, it is not possible to follow them all closely, nor do we want to. However, whether you’re trading them are not, you should know which of the major companies are reporting and when. Later in the letter, you’ll find a list of companies reporting this week. This list is only those whose price is above $50 dollars and ranks in the top 10% volume of all U.S. stocks.
It is a cross-section of companies from virtually all sectors of the market. So every sector, and possibly the broader markets, may be affected up or down on a day-to-day basis. There doesn’t seem to be much chance of a surprise from the FOMC Rate Decision, though; but there’s always that uncertainty and the price gyrations around the announcement.
The market internals followed are at the edge of a sell signal; however, it’s going to require the markets to move a bit higher for it to be a strong one. Sell signals, the majority of the time, happen when everything looks great. For the most part, that is the case now. While the NASDAQ is extended to the upside — and it has been before, but without the internals aligned with a warning.
If we do get that internals strong sell signal this week, I suspect that the majority of a correction will happen where prices are most extended. And while there are still sectors and stocks that look attractive, it’s historically difficult for even those to advance much during a corrective phase. However, they would be the ones expected to show relative strength and that is certainly what we will be monitoring.
DOW JONES INDUSTRIAL AVG.
Above is the chart of the Dow Jones Industrial Average that we review each week. Last week, the Dow was down a little less than .5 %. Overall, it was another whippy, sideways week of price action at the higher level set the prior week.
In last Monday’s letter, I wrote about the possibility of a Breakout Bar Failure (BBF) pattern happening. That pattern did continue to setup when on Monday, when the anticipated inside bar formed (traded inside the prior days range) at the top of the prior bullish Wide Range Bar (+WRB) Breakout from the prior Friday.
Unfortunately, rather than trade through the low of the inside bar, prices gapped down significantly below it. When the BBF pattern forms, and then prices trade through the low of the inside bar, it creates uncertainty — or a minor shock — that feeds on itself producing more selling, and a move lower.
That gap down on Monday did have a “shock to longs,” but it was too much of one, and then selling quickly increased, which sent prices lower into Minor Support (mS). Buyers took control at that minor price support area and a Bottoming Tail (BT) formed by day’s end. That was followed by the choppy sideways price action the rest of the week.
The BBF outcome did not turn out exactly as anticipated because of the gap. However, I am happy that you did see it setup before it was there and a reaction.
Thirteen of the 30 Dow industrial companies will be reporting earnings this week. Two of them are not on the list below because they are less than $50 dollars. They are Verizon (VZ) $44.23 and Intel (INTC) $34.70. Both report on Thursday, the 27th. Of all stocks reporting earnings, Thursday is the biggest day with 760 reports.
BROADER MARKETS
[s3mv fileName=’July+2017+Letter/7_24_17_Broader_Markets.mp4′ fileType=’video’ source=’s3′ width=’640′ height=’480′ splashImage=” preLoad=’Y’ autoPlay=’N’ belowVideoHTML=” cuePoint=” redirectURL=” pauseAtCuePoint=’N’ fixedSizeVideo=’N’ isSecure=’N’ bucketname=’mastertraders’]
TREND MATRIX
[s3mv fileName=’July+2017+Letter/7_24_17_Trends_Internals.mp4′ fileType=’video’ source=’s3′ width=’640′ height=’480′ splashImage=” preLoad=’Y’ autoPlay=’N’ belowVideoHTML=” cuePoint=” redirectURL=” pauseAtCuePoint=’N’ fixedSizeVideo=’N’ isSecure=’N’ bucketname=’mastertraders’]
Market Internals
We have a tentative or weak sell signal from our market internals
Big Dogs Reporting Earnings This Week
NEW TRADE IDEAS
Below is a daily chart of American International Group, Inc. (AIG), $64.20.
Trade: Over $64.35, consider buying Jul (7/28) $62.5 calls (5 DTE) for a limit of $1.91/share (which gives us high delta as a directional trade and paying no more than $.05/share time value).
Technical Setup: Anticipated Breakout daily after failed breakdown.
Option Strategy: Long Calls (LC). Call buyer pays a premium for the right to buy the underlying asset (stock) at a specified price (strike) for a specified period of time (expiry). Long calls are used to capitalize on upside market movements with less cost (leverage) and to limit risk (to debit paid). One (1) contract represents the right to buy 100 Shares.
Potential Gain is unlimited; Max Loss is the Premium paid. Break-even point is Strike Price plus the Premium paid.
Stop Loss: $63.78.
Below is a daily chart of Honeywell International Inc. (HON), $136.35.
Trade: Over $136.80, consider shorting Aug (8/18) $130 naked puts (25 DTE) for a limit of $.45/share.
Technical Setup: Breakout daily after bearish earnings gap negated, and bullish weekly and monthly.
Option Strategy: Short Naked Puts (SP). Similar to bull put spread except not buying the lower strike put. We sell put strike price below support where the pattern suggests that the stock will not close under at expiry. In exchange for the premium received, the put seller has the obligation to buy the underlying stock at the strike price on or before expiry.
The Max Gain is the Premium received, which is realized if the stock closes above the short put strike at expiration. The return on investment (ROI) is the credit received divided by the margin required to hold the position. The break-even is the short strike price less credit received (i.e., also your cost basis if assigned the stock).
Considered a mildly bullish strategy since we are not buying calls or stock and just calling a short-term bottom in the pattern. Trade has positive theta (meaning you make money on time decay) making it a high probability trade since we time entry with the technical pattern.
Max Gain: Credit received. Cost basis if assigned is short strike minus Credit.
Stop Loss: $133.68.
Below is a daily chart of NVIDIA Corporation (NVDA), $168.10.
Trade: Over $169.20, consider shorting Jul (7/28) $160/150 bull put spread (5 DTE) at mid-point but no less than $.55/share (closed at $.64/share).
Technical Setup: Breakout daily, strong uptrend weekly and monthly.
Option Strategy: Bull Put Credit Spread (BPS). Defined risk strategy where you make maximum profit (net credit received) if the stock closes above the short put strike at expiration. We sell put strike price below support where the pattern suggests that the stock will not close under at expiry, and simultaneously purchase lower strike put than the one sold as a hedge and to reduce margin.
The return on investment (ROI) is the credit received divided by the maximum loss (i.e., width of strike prices less premium received). The break-even is the higher strike price less credit received (i.e., also your cost basis if assigned the stock).
Considered a mildly bullish strategy since we are not buying calls or stock and just calling a short-term bottom in the pattern. Trade has positive theta (meaning you make money on time decay) making it a high probability trade since we time entry with the technical pattern.
Max Gain: Credit received. Cost basis if assigned is higher strike minus Credit.
Stop Loss: $154.48.
Below is a daily chart of Coach, Inc. (COH), $48.74.
Trade: Over $189.41, consider buying Aug (8/11) $46/50 bull call spread (18 DTE) at mid-point (closed at $2.58/share).
Technical Setup: Breakout daily in strong uptrend weekly/monthly.
Option Strategy: Bull Call Spread (BCS). Defined risk strategy where you make maximum profit if the stock closes above the short call strike at expiration. We buy bullish calls and then sell OTM calls to reduce the cost of the long call and generate time decay income.
The return on investment (ROI) is the Gain divided by the Debit, which is the maximum loss. The break-even is the lower strike price plus debit paid. Considered a mildly bullish strategy since we are not buying outright calls or buying stock, and willing to cap our gains in exchange for gain from time decay.
Max Gain: Credit received. Cost basis if assigned is higher strike minus Credit.
Stop Loss: $47.88.
Below is a monthly chart of Pandora Media, Inc. (P), $9.47.
Trade: Over $9.50, consider shorting Aug (8/18) $9 naked puts (25 DTE) for a minimum of $.38/share (closed at $.41/share). NOTE: Earnings 7/31, and this is meant to be an earnings trade.
Technical Setup: Climactic Buy Setup and Bottoming Tail on Major Support, with Increased/Igniting Volume monthly.
Option Strategy: Short Naked Puts (SP). Similar to bull put spread except not buying the lower strike put. We sell put strike price below support where the pattern suggests that the stock will not close under at expiry. In exchange for the premium received, the put seller has the obligation to buy the underlying stock at the strike price on or before expiry.
The Max Gain is the Premium received, which is realized if the stock closes above the short put strike at expiration. The return on investment (ROI) is the credit received divided by the margin required to hold the position. The break-even is the short strike price less credit received (i.e., also your cost basis if assigned the stock).
Considered a mildly bullish strategy since we are not buying calls or stock and just calling a short-term bottom in the pattern. Trade has positive theta (meaning you make money on time decay) making it a high probability trade since we time entry with the technical pattern.
Max Gain: Credit received. Cost basis if assigned is short strike minus Credit.
Stop Loss: $8.38.
Adjustments and Comments on Open Advisory Letter Trades Note: Our Trade Updates are timely posted in a separate Report in the Member’s Area. Please 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. Thank you.
NOTE: Please see Master Trader Guidelines for Trading the Open and Gaps in Member’s Area for rules on trade entry, gaps, etc.
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
Follow Greg on Twitter, YouTube, and StockTwits to get real-time updates and education:
Twitter: @GregCapra
Stocktwits: Greg_Capra
youtube.com/c/mastertrader (please subscribe to receive all the timely stock market updates)
NOTE: Master Trader will show opening and closing prices of all stock and option trades. We do not recommend proper share size for your particular trading style, risk tolerance, or account balance. We urge you to calculate your own share size based on your individualized risk parameters, Trading Plan, and familiarity with the proposed trade strategy and risk.
NOTE: Master Trader and its representatives might have existing positions in these and other trade recommendations before or after suggested herein. Additionally, we often manage them differently for internal purposes based on different risk parameters than noted herein.
