The earnings season is going to kick off with AA next week and I am so excited as it moves the market!

Earnings Play Examples

There are many ways to play with the earnings with the options and I hope I could cover them all some day.  Here are some earnings play examples:

1. Take the delta neutral straddle/strangle positions a couple of weeks BEFORE the earnings, and take them off right before the earning release in order to take advantage of IV (Implied Volatility) rush.

(Note: IV rush occurs toward the earnings release when many traders speculate the underlying stocks which in turn pump up the option premium.  Same theory that you might have to pay an extra premium to get the flood insurance right before the hurricane season).

2. Take the delta neutral calendar positions RIGHT BEFORE the earnings release to take advantage of IV crush.

(Note: IV crush occurs after the earnings release.  Same theory that the insurance premium drops after the hurricane is gone).

3. Take a directional trade before the earnings release and hold on to the position afterwards for an instant gratification of the profits.  This is the most riskiest strategy of them all, and a lot of retail traders lose money on the earnings because of this.  Unless you know how to pick the direction and understand IV pump and dump, you will be most likely losing money on the earnings play.

4. You take the trade AFTER the earnings release.  The results of the earnings would often times accelerate to the direction of the earnings.  You would have a better sense of direction and a better risk/reward.

I have discussed the first 3 examples previously, but I have never discussed how to approach the "after earnings" play, so I am going to cover this topic this week.

Why "After Earnings" Play?

If you are playing with "Before Earnings" play as discussed in item 3 above, you are really going for a gap up/down of the earnings results, which accounts for a very small portion of the entire price movements and it's not worth risking your capital. 

AA Last Earnings

If you take a look at AA's last earnings, you can see a "gap" as such a small portion of the entire price move. 

 
BIDU Earnings Price Move

You can take the trade AFTER the earnings and still make a pretty good money.  If you take a look at BIDU's last two earnings, you can see that the price movements of the big volume candle tends to repeat.

BIDU Daily

By the way, here is the BIDU daily that I discussed a couple of weeks ago.  BIDU is right below the big wick candle as of last Friday and if it breaks above it, there is a very good probability of another $70 move.

 
AA Daily

Here is AA's daily chart.  AA is forming a very nice H&S pattern and I'm almost certain that AA will drop upon the earning release.  HOWEVER, unless you know how to play with the earnings, you would be better off waiting for the earnings release and then take the position.  Much better risk/reward and no surprises.  Of course, if you are looking for some excitement, you can take the trade beforehand at your own risk. 

 
Metal Updates

My metal trades are going quite well.  Here are some updates from last week's post.

GOLD

 
Silver Daily

 
GDX Daily

 
General Market Updates

I guess everybody now is watching 1200 area for SPX.  I would just stay away from the major indices – it's too high to go long, but too risky to go short (it just won't drop!). 

Here is the Q's weekly chart update that I posted last month.  Qs now closed above the previous swing high, which is almost guaranteed to reach the next swing high before the consolidation.

 
AMZN Daily

AMZN has been lagging behind the general market but it finally started picking up.

Have a safe trip and hurry back home, Tim!  I am going to hold the market for you until you come back!

This was brought to my attention during the week when somebody asked me how I swing trade.  Then, I realized that not many people are familiar with this concept, so I decided to give you an overview of the swing trade this week.

Swing Trade Basics

With the swing trade, you place a bet right above/below the previous swing point with an expectation of making 100% extension from the most recent swing low.

For those who have never seen the swing chart, here is an example of QQQQ daily swing chart.

Volume Confirmation

If the previous swing is being taken out with much higher volume (typically, more than 10%), then, that's considered to be the volume confirmation and the probability of success is as high as 75~85%.  Here is the MA chart.

SPY & QQQQ Price Projections

As many of you may know, I used to make a weekly post at a different blog site, and as of June 6, 2009, I made the price projection as follows:

SPY Weekly Chart (as of June 6, 2009)

QQQQ Weekly Chart (as of June 6, 2009)

 

These projections were made when the April swing highs were being taken out. 

In a retrospect, my projections were not that much off, but many people thought that I was totally out of my mind coming up with such price projections (remember, those were the times (and still are) that many were expecting "one more drop" to the downside).

This was the comment added by the blog host on the face of my weekly post:

"Although there is technically nothing wrong with Fujisan’s channels there are various sentiment indicators that have currently reached extreme readings and which therefore cast doubt on the notion that we’ll push all the way into 1100 on the SPX or 1640 on the NDX. However, it’s not impossible and if we rally higher from here (a very distinct possibility)"

(Note:  My intension is not to ding him.  I just wanted to point out the sentiments shared by many traders back then.  After 9 months, this sentiment has not changed.  Many traders still think that various sentiment indicators have reached "extreme" readings and there is a very distinct possibility that we'll push higher from here – although I admit that it's short term overbought). 

SPY Weekly Chart 2010 Price Projection

Now, as the most recent swing highs were being taken out this week, I am making the new price projections with an expectation of 100% price extension from the most recent swing low. 

I have already expressed my long term bullishness at my last week's post, but here is my intermediate market view based on the swing points.

As long as I can tell, SPY did not close above the previous high with the volume, therefore, a=c price structure is not confirmed.  However, there is a very good chance that it could go to the next swing point, and that's what happened in the previous leg up (it did not close with the volume but it went through many swings and sideway movements, and eventually made it through 100% extension). 

QQQQ Weekly Chart 2010 Price Projection

Just like SPY, QQQQ did not close the weekly candle with the volume, therefore, a=c structure is not confirmed.  However, once it closes above the previous swing high, it could go to the next swing.  Please note that 200 SMA and 50 SMA are about to cross.

IWM Weekly Chart 2010 Price Projection

Just like SPY and QQQQ, no confirmation on the volume, but the next swing point is almost as good as a=c price target, so, in a way, IWM will most likely complete a=c structure.  Please note that IWM closed above 200 SMA for the first time in 20 months.

If you think that my intermediate price projections are totally out of the question, just look at my June 09 price projections and see what happened.  If you just keep shorting this rally expecting a big drop, you are falling for the same traps.

How can we trade?

This tape will be very difficult to trade for both bulls and bears.  Unless you went long 1 month ago, it would be difficult to go long at this point and we may see many sideway price movements just like the past year.  Ok, so how can we trade?

1. Avoid the indices, especially SPX and INDU.  If you like to trade the indices, you would be better off by trading IWM and/or QQQQ.  Much better momentum.

2. Find the individual stocks that are moving.  There are many stocks that are breaking out of the current trading range.

3. Keep adding long positions on a dip and don't pay attention to the small price fluctuation.  You will eventually get there (believe it or not, this was the most effective trading strategy last year).

For those who are interested in accumulating the long positions over time, here is QQQQ Sep 45/50 bull call spread.  Just keep addding on the dip.  This is a theta positive position so you don't need to worry about theta burn.

SPY Daily Chart Update

I was hoping to see some kind of pullback after SPY hitting my price target.  However, SPY did not sell off into the close on Friday and still closed above the previous swing high, so, I have to remain bullish until the price rejection.  With OPX and FOCM coming up next week, together with the quadruple witching, my bias is still to the upside.  It almost seems to me that all the major indices are waiting for INDU to make the new recovery high before a pullback.

EUR/USD

Last but not least, here is my EUR/USD update.  You might like to pay a close attention to this pair, as it is right around "make or break" point.  Once it goes above Friday's high, this could be the break out of the current downside channel, which is positive to the equity market, and vice versa.