It's so nice to see the market taking the exact route as predicted. Let's see how this is going to unfold for the coming weeks.
DIA & INDU Daily Chart
DIA is the only ETF that has not filled the gap from Oct, and strange enough, DOW is the strongest index of them all at this point. If there is any index driving the market, it has to be Dow.
SPY Daily Chart – H&S or Three Drives??
Last week, I suggested a possible H&S pattern on SPY due to a broken trend line. By looking at this week's price action, I'm more leaning toward the three drives pattern instead of the H&S pattern, so I decided to put both up.
Three Drives Pattern
The reason that I'm more leaning toward the three drives pattern is because the first two drives are "too identical", both in time and price, – it's more like "Head & Head" – coupled with the previous low not being taken out (I guess you could still call it H&S with a diagonal neckline), and it seems to me that SPY likes to repeat this pattern one more time. This is not as clean as DIA's three drives pattern due to a broken trend line, but it goes quite nicely with EUR/USD pattern as illustrated below, so let's see how this plays out.
IWM is forming either H&S or M&A pattern. The question is how high RS (or A) will go.
The EUR/USD trendline from last week held and so was the pattern. My price target remains to be 1.5204.
VIX Daily Chart
I don't know if this ever plays out the way it's illustrated, but if it does, that would work out perfectly with my three drives pattern.
I know that many of you are expecting the market to quickly resolve to the downside and some of you may have been probably loading up a lot of OTM put options for so called "P3" scenario, but let me emphasize once again that the market WILL NOT drop from here. All the major indices are forming a very distinctive market cycle (as illustrated above) and if this pattern holds, it will take 21 trading days to complete this cycle, and the chances are, we will be in this trading range for another 3 weeks. If you like to load up put options, please hold your horses and wait until Nov OPX week.
The US equity market has a tendency of hitting a peak of the cycle during OPX week. Whether it's H&S or Three Drives, you would have a better chance of catching a top of the cycle if you wait until then. I will cover both short term and long term bearish play at that time, so please do yourself a favor and DO NOT load up OTM options.
How to pick ITM Options?
I got the question as to how to pick up ITM options and I thought that this would be a good topic to cover this week.
I would look into Delta of AT LEAST 0.8 and open interests > 1,000. This way, your ITM options will mirror the underlying stock's price movement much closer (the underlying stock's delta is 1) at a much lower cost.
GOOG Pin Play
A few weeks ago, I have discussed an income strategy on GOOG (i.e., iron condor) to take advantage of a range-bound price movement. Here is an updated GOOG daily chart and GOOG is still within the price range.
Now, as we are getting close to Nov OPX, I would like to introduce another low risk/high return option play called "pin play". With pin play, you make a price projection for OPX and take a position accordingly.
GOOG is know to be expiring in 50 increments (500, 550, 600, etc), and with GOOG currently trading right at 551, the probability of GOOG expiring right around 550 is very high.
Let's take a look at Nov open interests.
As you can see, there are more than 7,000 open interests at the strike prices of 500, 550, 600. If yon look at 1 standard deviation price movement, both 500 and 600 are out of the range, and 550 is the only possibility for a potential pin play unless something drastic happens to the market to change the course of the action.
OPX Pivot Setup
This is a side note, but a very nice feature was added to TOS chart. I use Person's Pivots a lot for my daytrade and the pivots typically have daily, weekly, and monthly set up. TOS recently added "OPX" set up for the pivots. This helps us the option traders tremendously to figure out the OPX trading range. Thank you, TOS!!
For those who are interested in SPY OPX price range, here is the SPY OPX pivots. From a swing trade point of view, Friday's close was very bullish. Once SPY closes above the previous swing point of 106.86, there is a very high probability that SPY will go after the next swing point, which is the previous high.
I was able to get into this position at a pretty good price and now it' already up 80% (got in at $1.05 on Monday and now it's $1.80). If you like to put this position on, please wait for a good entry point. As this is a "make or break" position, I like to keep the cost less than $1.00 per contract if it's all possible, and should not be more than $1.50 per contract (to keep 1 to 3 risk/reward ratio)
If you miss a good entry, don't worry, wait for next month. I laid out how to approach to this strategy and you can do the same on your own. If you are new to this concept, paper trade it first, and then start trading small.
I'm expecting to make approx $4~5 per contract if I was able to hold on to this position up to OPX (not max $9 per contract, unless you are willing to hold on to your position through OPX). I would set up GTC order to exit at various prices - like 0.50 cents increment (such as 1.95, 2.45, 3.95, etc) and eventually playing with a house money. You don't need to take a profit all at once.
Warning: Due to a highly speculative nature of the trade, please do not risk more than 1% of your speculative account. Please be prepared to lose the entire premium if the trade goes against you.
GOOG Long Term Bullish Play
If GOOG takes out the previous high and closes above it, GOOG could go up to 600, so I would drop everything and switch into a bull call spread when it happens. This is a side note, and I'm hoping to cover this topic in the future, but if you compare those power house stocks (i.e., AAPL, AMZN, BIDU, GOOG), they all have a very identical chart pattern on a weekly basis, except that GOOG is lagging behind. If this chart pattern holds, GOOG will follow the crowd and go above the all time high, so I'm planning to cover GOOG long term bullish play when the time comes.
Nov OPX Speculative Play
As we are getting close to Nov OPX, I'm going to cover some OPX speculative option plays next week, so stay tuned!