In a market showing signs of volatility, you must have the willingness to not only be flexible, but a willingness to practice patience while waiting for ideal entries. This is a good environment to be “balanced,” with a few long positions in bullish stocks or sectors and a few short positions in bearish stocks that are breaking structure.
Google and Amazon were very profitable trades for us in April. Profitability had nothing to do with the stocks and everything to do with the structure of the environment. As traders, we don’t want to fall in love with the stock. Instead fall in love with high-probability setups, entries, and exits. Once the structure that served us well is no longer present in a particular group of stocks… we should no longer be present either.
This week we saw something we haven’t seen in weeks — volatility. The daily chart of the Volatility Index (VIX) (below) is an important one to study here. When VIX is quiet, trading in a range near its 21 exponential moving average (EMA) is typically smooth sailing for the markets. However, when volatility suddenly spikes to +2-3 average true range (ATR) on the daily chart, well, you saw the brief impact of that this week. Not always, but more often than not, a move to +2-3 ATR for VIX results in a -2-3 ATR move lower for the indexes, and that’s what we saw unfold.
Daily Chart for VIX
After an ugly flush under the 21 EMA on Wednesday and Thursday, the SPY (daily chart below) was able to rally its way back above the mean today after an impressive bounce (a good reminder of why we don’t short at -2 ATR. Much of this bounce in the SPY was due to strength in the energy, financial, industrial, and transportation sectors which continue to be the clear leaders in this market (and sectors where we’re looking for upside opportunity).
Daily Chart for SPY/ES
On the other hand, tech stocks (QQQ) and semiconductor stocks (SMH) continue to be the laggards here, both completely losing bullish structure on the daily charts (below). These are now trading well under their falling 21 EMA points. With this kind of structure, we view stocks in these two sectors as “short the rally” stocks rather than something we’d try to get long in. We like the idea of going short tech stocks like AMZN, but we would need to see a bounce back to the 21 EMA before considering an entry, as we’re too extended to the downside (chart below). Though they could drop lower from here, in terms of probabilities, a short entry at -2 ATR will not likely serve us well over the course of our career.
Daily Chart for QQQ
Daily Chart for SMH
Daily Chart for AMZN
For new long positions, we want to focus on trading stocks in sectors that have maintained their bullish structure, such as CAT, MMM, and UNP. The new trade we took in CAT this week is a great example of what we are looking for, not only has CAT maintained its bullish structure as the market dipped, the sector it belongs to (XLI, Chart Below) maintained its own structure and continues to show signs of leadership.
Daily Chart for XLI
For CAT (below), we took yesterday’s bounce off the 21 EMA as an opportunity to open a new position (remember, we caught a nice move for profits on this one last week) with a 6/11 expiration 235/230 put credit spread. Should the structure hold up, we’ll be looking to take profits on a push into $248-$250, which is about +2-3 ATR above the 21 EMA. Should the stock unravel and fall below -1 ATR, we’ll look to cut our losses.
Daily Chart for CAT
Taking advantage of the flush earlier this week, we sold a call credit spread on TSLA that led to a quick $1,700 profit. This trade was a good example of the kind of structure we look to short, as well as the ideal entry we look to take (near the 21 EMA). On both the weekly and daily time frames, TSLA is showing signs of a breakdown, trading under the 8 and 21 EMA points. TSLA lost it’ positively stacked EMA range, and histograms turned negative.
Once we got the flush to -2 ATR, that was all we were looking for and we took the money and ran. Bearish structure, short entry near the 21 EMA, book profits at -2-3 ATR, rinse and repeat! This is how you trade the ebbs and flows of a chart with a focus on high-probability entries and exits.
Daily Chart for TSLA
Next week, the tone will be set by whether or not the SPY can hold above its daily 21 EMA. If it can hold, stocks in strong sectors such as energy and industrials should continue to move higher. However, if the SPY once again falls under the 21 EMA, this could lead to another leg to the downside for the overall market, which could easily put a damper on the momentum of these leading sectors.
We also suggest keeping a close eye on the VIX. If it stays near its 21 EMA, that fares well for the market moving higher. Should we see another big +2-3 ATR push to the upside for VIX, that will likely send the market right back down.
Just like we do in any environment, we will be focusing on the structure of the overall market (SPY) to dictate whether or not we want to focus on longs or shorts, and will stick to our rules of taking entries at the 21 EMA and taking profits at 2-3 ATR extensions.
Stay tuned for this Sunday’s premium video, where we’ll dive in and cover a few setups we’ll be focusing on in the weeks ahead!
E-mini Nasdaq-100 futures (NQ) finally lost the 50-day simple moving average (SMA), causing both E-mini S&P futures (SE) and E-mini Dow futures (YM) to drop down to their 50-day SMA. With a relief pop today, it’s critical to see what happens next. Is this pop a perfect opportunity to short or is this the beginning of a chance to buy the dip?
We’re focusing on some key inflection points to guide the way. If the market continues to go lower, we’re watching for ES to move toward the Weekly 21 exponential moving average (EMA) and into the daily Ichimoku Cloud. We need to keep a tight focus to end the week strong.
With the three indexes continuing to not play along, E-mini Nasdaq-100 futures (NQ) is finally starting to drag down the market after lagging so much. Will this continue all week or will we see a sharp rebound from tech? Remember, we need to take it day-by-day!
Here is our focus list for the week:
NVDA – Watching for a drop toward the 50-day moving average (MA) or for a bounce back up toward point of control (POC) in the 593 area
FB – If it continues to trade below the 21-day exponential moving average (EMA), it could take a trip back down toward the 50-day MA and 296 levels
GOOGL – If it holds the 21-day EMA, we’re watching for a bounce back up toward POC, which is currently 2337
ROKU – Watching for a bounce at gap fill back up toward a POC of around 316. If it breaks below 300 it could also visit the 200-day MA at around 290
TSLA – Breaking a D wedge and firing a 4-hour squeeze to the downside, we’re watching for a trip back down near the 200-day MA, right near the key level of 591
As we gear up for this week, we need to be patient with tech stocks. The QQQ needs a few solid closes above the 21 exponential moving average (EMA) before we’re confident it can resume its bullish trend.
The SPY has a structure on the daily squeeze that leads us to believe we could have several weeks of solid upside, just like last month. Should the SPY fire this squeeze long, we’ll have the “wind of the overall market” at our backs for swing trades.
When a squeeze in the index is lining up, it is our time as swing traders to look for high-probability setups. We like LEN and GOOGL for swings to the upside here. We have a position in LEN, and will wait for QQQ to regain a bit more structure before jumping into GOOGL. Keeping an eye on indexes is always a wise way to plot our next moves.
This week was an interesting one, to say the least! We head into the weekend with a beautiful daily squeeze in the SPY (that looks like it’s preparing to fire long, first chart below) and on the other end the QQQ (second chart below) flushed to the downside earlier in the week even trading below it’s 21 exponential moving average (EMA). This was a bit of a sloppy week for tech stocks. Also worth noting is the Small-Cap Index (IWM, third chart below). Much like QQQ, the small caps were volatile to start the week with a flush under their 21 EMA, but were ultimately strong enough to regain their footing. We saw a bounce back above the 21 EMA to end the week.
SPY ChartQQQ ChartIWM Chart
As far as tech goes, we are going to hold off for a few days before jumping into any long exposure, as we would ideally like to first see a few solid closes above the 21 EMA. Should the Qs (QQQ) hold up and get back on their own two feet, we love the GOOGL daily squeeze for a push into new all-time highs. Remember though, GOOGL wasn’t able to get anything going out of its most recent daily squeeze until the QQQ started the party. If we are going to look for a similar move from GOOGL again, we will certainly need the wind at our backs from the tech index.
The structure of the SPY, on the other hand, looks promising for a solid push higher over the next week or so as the daily squeeze is just about ready to fire long. Think back a few weeks ago when the SPY fired its squeeze long, and remind yourself of all the directional opportunity it brought with it. Should this current squeeze once again fire long, it will be time to look for high-probability setups that we can jump into, with the momentum of the overall market providing wind at our backs.
CAT Chart
Our trade in CAT (chart above) was a nice and easy one this week. We loved the daily squeeze in Caterpillar, along with the daily squeeze firing long for the industrial sector XLI, in which Caterpillar is a top holding. This is exactly what we mean by looking to have the wind at your back when swing trading. It wasn’t just a setup in CAT that led toward a high-probability of a solid push higher, but also the fact that the sector it belongs to had its own squeeze and was supportive of a move higher. For this trade, we sold a May 21 expiration -232.5/+272.5 put credit spread for $1.60 of credit. This afternoon, as the stock pushed through the 2+ average true range (ATR) extension on the daily chart we were able to buy back our spread at $.80 for a little more than 50% of max profit in a few short days. A nice trade, and a structure that we’ll look to trade over and over again.
NDX Chart
For the iron condor we sold last Friday on the NDX (chart above), this turned out to be nothing more than a breakeven endeavor (which admittedly, is always better than a losing trade). Now, had we held this condor into today’s session it would have resulted in a max profit trade, but yesterday’s price action was sketchy to say the least. The NDX continued to chop around our short strike of 13,500 and at that point, we didn’t have much cushion going into today’s expiration.
We made the decision to cut the trade for a breakeven yesterday, mostly for peace of mind, as nobody enjoys going into the weekend after taking an unnecessary losing trade. Though this would’ve worked out perfectly had we held on, we don’t want to get caught up in the game of hindsight as traders. At the moment, we made the best decision regarding protecting not only the big profits we closed on Amazon last week, but also protecting our peace of mind. Not every trade is going to be a winning trade (obviously), but when we can get out of a setup that is going against us with no blood drawn — in our book that is good trading!
In Sunday’s newsletter, we will discuss our newest position in the LEN daily squeeze (chart below), along with a few other setups we are actively stalking. The SPY looks primed for a solid push higher. Until then, rest up, enjoy time with family, and be ready to get back to work on Monday. Stay Focused!
With all three major indexes squeezing, will tomorrow’s Nonfarm Payroll (NFP) jobs report get things moving?
We’re continuing to watch if YM will lead the way with the daily squeeze trying to fire to the upside, or if NQ will drag the market down with its daily squeeze starting to fire to the downside.
Choppy times call for patience.
To end the week, we’re going to focus on quick scalping at inflection points, getting our piece of the profits, and getting out. There is a big move coming, but we want to make sure we survive in the meantime.
As the three indexes linger near an all-time high (ATH), and with YM and NQ squeezing on the daily charts, the goal this week is to be very patient and see which way the market goes. Right now we are seeing clear rotation into YM and out of NQ to start the week, which is causing ES to be at a standstill. Every trading session we will get a glimpse of how they are rotating, and with these big picture squeezes, patience will pay off for the bigger move.
Just like last week, the 4-hour Ichimoku Cloud is the best compass for if/when the market could start to roll over. As long as the price stays above, the market can continue to squeeze or breakout higher. Be weary of “Sell in May and Go Away,” but also be ready to attack on the best opportunities each day. We’re keeping things tight with no plans of swing trading unless the market leaves current range, either above or below.
Here is our focus list for the week:
NVDA – Keeping an eye on descending wedge and reversion to the mean (RTM) while also watching for a bounce near 591 and breakout through the wedge back toward last month’s point of control (POC) of 619 and staying in a range between 619 and 626
FB – Looking for a big gap fill below or it can hold with a 2-hour squeeze then go for more with ATH above. We’ll be watching for a bounce at gap fill, but also be ready to short.
GOOGL – Watching a gap fill below just like FB and keeping an eye on bounce or short. Chart is looking very extended so we need to be mindful as stock could benefit from RTM and gap fill.
SQ and ROKU – Earnings are coming up for these stocks, so we will keep an eye on them but most likely wait until Friday to take any action
