Oct9
(1) There are some very obvious key levels in the SPX this coming week and in order to identify those levels I only have to look at Thursday’s and Friday’s daily candles. What makes Thursday and Friday such important days? First, Thursday’s price was rejected exactly at the declining 20-day SMA upper band. Both day’s closed above the declining upper band of the 8-day SMA which shouldn’t happen if the sellers are in control so that makes those days very significant! A similar situation occurred 10-12 days ago. Price closed *one* day above the declining upper band but was unable to take out the high of the prior candle that had pushed above the upper band. Once buyer’s got above the declining upper band they were unable to follow thru. That’s bearish price action. You can see below what happened after that 3-candle sequence. Now we find ourselves in a very similar situation (history doesn’t always repeat but it often rhymes). Thursday closed above the declining upper band but yesterday was unable to exceed Thursday’s high and closed as an inside day. Inside day’s represent indecision and typically if the following day’s price exceeds the inside day’s high it’s a long trade (with a stop below the inside day’s low) and if the following day’s price falls below the inside day’s low it’s a short trade (with a stop above the inside day’s high). Thursday’s range is very important for this week’s trading! If Monday’s price drops below Thursday’s 4383.73 low then it would be bearish and I’d expect price to decline with the likely target being at least 4325 and potentially even new lows. I don’t need to worry about those targets specifically yet because I’ll be watching the actual price action as it occurs instead of trying to predict what price will do! Target levels are simply where I see potential buyer’s lining up. I have no way of knowing if those buyer’s will be strong enough to reverse a falling market. If Monday’s price breaks out above Thursday’s 4429.97 high then the buyer’s are stronger then the sellers and it would be very bullish. I’d then be targeting the 4478 area but, again, following the actual price action on the 60-minute timeframe to see if price is remaining above the rising 60-minute bands. As always, and this is very, very important, if price triggers a bullish or bearish scenario as I laid out but then fails to follow thru as it should I do not ignore that failure! There’s no time in trading where I can ever say ” well, the bulls or the bears have won so I don’t have to watch the chart anymore, I can just sit back and make money”! Trading a failed move, whether it’s a breakout or a breakdown, can be a very profitable trade and ignoring it is a big mistake! So there you have it. I’m bullish above 4429.97 and bearish below 4383.73 and I think there will likely be strong moves in which either direction wins out. Full disclosure, I use the daily chart for longer-term option trades (typically 3-6 months duration) but I do the exact same analysis as I’ve shown here using the daily chart on the 60-minute chart to determine whether SPX is a long or short to trade shorter-term options with 1-3 weeks duration.
(2) My charts consist of very few indicators. You won’t see RSI or MACD or anything else as a ‘lower study’. There’s the price candles, the 8 SMA bands and the daily, weekly and monthly high, low and HB (Half-Back or 50% retracement) pivots. That’s all. I don’t need anything else. The /RTY chart shown below is the hourly timeframe but I can use the exact same setup on any timeframe. Why the 8 SMA bands? Because it works. It’s not a magic timeframe, it’s almost identical to the 9 or 10 SMA or EMA but I’ve used it for years and it rarely fails me. It’s simple enough to follow. When the bands are sloping up then they provide support and the lower band is typically a very good location for a long (bullish) trade. When the bands are sloping down then they provide resistance and the upper band is typically a very good location for a short (bearish) trade. A strong price move separates itself from the bands and on weaker moves that often end up with a reversal the candles tend to stay within the bands and the slope of the bands flattens.
There are a lot of nuances to price action analysis and I’ve listed a few on the chart. When something should happen but fails to happen, then often the very opposite price action occurs. There’s a great example on the chart when, between numbers 1 and 2, price broke out above last week’s and last month’s HB resistance but then dropped back below those pivots on the next candle. A failed breakout is bearish. Why? If the bulls were strong and that was a true breakout they should not have allowed price back below the breakout level. Initially the bears weren’t very strong either and price drifted sideways for 5 candles but that allowed the bands to rollover from bullish-support to bearish-resistance. The hourly trend had changed!
One comment on why I don’t believe RSI or MACD is particularly helpful to my analysis. I use the slope of the 8 SMA bands to evaluate momentum and trend. RSI will indicate when an instrument is over-bought or over-sold. Ok, so what? In a strong trend an instrument can remain in that condition for a prolonged period of time. RSI positive and negative divergences are often ignored by the price action so why not just watch the price action itself? Finally, I would guess that 90% of all traders rely on RSI or MACD and show it on their charts. I would also guess that at least 90% of all traders lose money trading. If most everybody is watching and trading with RSI then why are so many losing? Look, if it works for you that’s great. I don’t need it and you might find that you don’t need it either. 🤔 Focus on the price action instead of a derivative of price action. If you have questions about price action analysis you can ask them at the bottom of the post or you can look through the other posts in the ‘Price Action’ category on the blog.
Oct5
Big rally today across the board and I was positioned with short SPX Beta weighted Deltas at the open. 😬 Fortunately I recognized the breakout early enough to hedge my position. I tweeted this on the Vega Options private twitter feed 57 minutes after the open.
Below is the chart from that tweet. Click on the image to make it larger. You can see that even when ES was trading at 4332 I was targeting 4362 to Delta Hedge (DH) the long Calls I had just purchased with the plan of turning them into a zero cost or better Call Vertical spread.
ES rallied to within a few points of the target and started to lose momentum. I decided to DH the long Calls into a $15 wide Call spread for a net $1.25 Credit for the spread. Below are the fills that I got today.
If you combine that Call spread with the same strategy that I used last Friday, you can see that I now have 2 call spreads with the overlapping 4375 long strike and short 4390 and 4400 strikes where I’ve eliminated the possibility of a loss.
Those upside hedges will allow me to put more capital on the downside positions knowing that if ES rallies the Call spreads will protect me from big losses. I’m still expecting more downside price action in ES but it’s always good to have plenty of protection, especially if I can eliminate the entire initial cost of the ‘protection’ trade.
If you’re not sure you understand the technique I just demonstrated, read some of the other posts in the blog. I walk through these types of trades plus many other topics in many of the posts. Enjoy!
Oct4
Below are a few tweets from the Vega Options’ private twitter feed from today:
We went into today’s trading with a bearish bias based on the ES Sunday’s night price action. We arrived at that bias based on the fact that the HB zone of Friday’s potential bullish reversal candle wasn’t acting as support as it should have in a bullish scenario.
Not familiar with the HB zone of a potential reversal candle concept? Read The Law of the Large Candle post.
I tweeted about my current IWM position. I’m both short and long (bullish and bearish) in the same position. It’s the timeframe that separates the two positions. I’m bearish over the next week or two and bullish into the end of the year. The two positions act as a hedge against each other giving me some protection.
I also stated my readiness to hedge my bearish ES position if the price action warranted a change in my current outlook. I did not execute this trade today as I still view the current price action to be bearish however I’m literally one click away from being able to flip that position from bearish to either flat or even bullish.
Finally, Travis and I were in agreement that the day’s price action in SPY didn’t appear to be anything other than a bear flag following a steep price drop. Of course sometimes bear flag’s or consolidations after a drop can break higher. If that occurs we’ll both go with it but our current expectation is that price will breakdown. One of the most important tenets of Vega Options is to go with the price action, not to fight it. If you look just above at my ES position I’m clearly positioned for a move lower but I’m prepared to go with the opposite move if that happens. Go where the price leads you!
Oct3
In last week’s post (The Week of Sep26) I discussed my ES Ratio Spread. It had built up a nice profit because it was initially a bearish directional trade. Below is the risk profile from Thursday, Sep29 when SPX was trading at 4309. The position was -62 Deltas. That amount of short Deltas is great when SPX is moving lower but not so good when SPX is moving higher. After a large price drop it’s typical to see at least a ‘relief’ rally and I prepared for that by Delta Hedging (DH) my position to reduce the short (negative) Deltas.
2 hours after the RTH open on Friday, Oct1 I tweeted this to the followers on the private Vega Options twitter feed.
I adjusted my bearish ES position to reflect that expected price action. The simplest and quickest adjustment was to add some long Calls to take the Deltas from -62 to +10.
As the price of SPX rallied strongly I sold some further OTM Calls with the same expiry as the long Calls I purchased earlier to create a Call Vertical Debit spread. That reduced the net cost of the original long Calls from $7487.50 to $612.50 for the vertical spread.
When all the options of the position are combined this is now the resulting risk profile. The Delta’s now have reverted back to short at -47.
Bottom line: I took advantage of the SPX Friday rally to add a low net cost Call Vertical spread to the position which raised my minimum profit above SPX 4370 from $1,000 to $5,000 while retaining a large profit potential if SPX continues it’s downtrend.