While there are a handful of great looking trends and squeezes setting up in the market, it would be foolish of us to ignore that the indexes and almost every major sector Exchange-Traded Funds (ETF) are extended here. When it comes to building swing positions in an extended market, here are a few of our favorite tips.
1. Find a trend, find a squeeze.
In an overall extended market we become very strict as to the setups we’ll trade. Our goal is to find setups that can continue their upward trajectory over the course of weeks or months even in the event the markets pull back a bit. Often uptrends and squeezes on bigger time frames, like the weekly and 3-day charts, offer the trend and structure needed to survive a short-term selloff.
2. Give your trades plenty of time till expiration.
When the indexes are extended we will look for weekly, 3-day, and daily squeezes to begin scaling in to our max position size. We like to give our swings five to eight or more weeks until expiration as this allows us to comfortably sit through any “short-term” downside while still being positioned for the bigger picture move.
3. Premium decay is your friend.
Buying calls on trending stocks works great when the market is rallying but can quickly turn troublesome in the event of a pullback. When the market is extended we opt to sell credit spreads on our setups as they are much more forgiving than long options. When the market is closer to the daily 21 exponential moving average (EMA) we are more open minded to getting long calls/long debit spreads.
These are just a few simple tips and adjustments we like to make in our trading when the indexes are trading at 3+ average true ranges (ATR). When the market is this “cooked” there is increasing potential for a short-term pullback, one which may only last a few days. Our goal is to get positioned for the continuation of bigger picture trends while at the same time being able to hold through short lived downside.
AMZN with its monthly, weekly, 3-day, and daily squeezes is a prime candidate for this kind of swing trading right now, and we are looking to slowly scale in to January expiration swings.
Our game plan for GOOGL with its solid 3-day squeeze is exactly the same, and we have already started building positions in both AAPL and NFLX in the Compounding Growth Mastery with January expiration put credit spreads.
In Sunday’s premium video, we’ll take a look at the exact spreads we are looking to initiate on these setups, our current open positions, along with a look at this week’s Focus Scans results!
Stay Focused!