Record Close for SPY Today

What a GREAT day it was for my account! New highs, and new record close. I’m still bullish, but with caution.

Click on the chart to visit my Trading View page.

A couple good things to note from today. 1) Volume was kind of weak until the end. It wasn’t horrible, but it wasn’t great either. It did pick up and ended up closing with about average volume. That’s a good thing. Low volume plus the record close would maybe be a bad thing. 2) The RSI divergence I wrote about yesterday is pretty much gone now after today. That is also a good thing.

Now, a couple of bad things to note from today. 1) The market is just one negative tweet, or one negative trade war news story from sending it down. That is enough to make me proceed with caution. I am still bullish, of course, but I’m cautiously bullish. 2) Jerome Powell (the Fed) speaks on Wednesday afternoon. He has moved the markets before, and he could move the markets again. If the market is looking for a 50 BP cut, and we only get a 25 BP cut, that could be bad. Or, even worse, if there is no cut at all that would be VERY bad for the markets. Everyone wants a cut, regardless if it’s a good thing or not.

Keep your eyes peeled and stay vigilant. Being at these all-time highs, a lot could go wrong. But, a lot could go good also. We will just have to wait and see what the near-term future holds for us.

My guess… and this is just MY guess alone… is that we move up and play in the $315 to $325 area for SPY. If negative news comes out, or if Jerome Powell dissapoints, forget about it! We would then probably fall well back into the $290’s.

Good luck to all, and may we all profit!

RSI Divergence on S&P Futures

As soon as I started charting and prepping for tomorrow, I noticed that there is RSI divergence on the daily /ES (S&P E-mini) chart. Not only that, but there is declining volume as well. And it doesn’t end there… we are at all-time highs while all this is happening.

Take a look at this chart I made on Trading View.

Notice how the black line at the top of the chart, and the black line in the RSI section are moving in opposite directions? That’s called divergence. And when there is divergence on a large time frame such as the daily, and when that divergence is happening with a momentum indicator like the RSI (Relative Strength Index), it is definitely worth keeping an eye on.

The RSI is a momentum indicator, so it is showing us the direction of the overall trend which has been climbing for quite some time. But it started to crest a few days ago. Notice how it never reached as high as the crest before it? That’s an ominous sign. And that is the divergence, as the S&P has continued to climb through it all.

Not only that, but notice how long the volume has been declining? This is implying there is relatively no buyers left in this market. This is implying that there might be some exhaustion on the buy side.

Sometimes, but certainly NOT always, divergence tends to predict near term movement. When the divergence on the RSI is to the downside, the stock tends to move down eventually. The opposite happens when there is divergence to the upside on the RSI. However, it does not ALWAYS work out this way.

I just wanted to point this out. It is a big bearish technical indication, and is worth keeping an eye on. We are at all-time highs, which makes it even more important to look at. You have to understand that this market is having a very tough time deciding if it wants to break through to new highs. Yes, we keep making new highs, but we can’t seem to close at new highs – there is a difference.

I will be watching my positions closely tomorrow. Right now I am pretty well balanced with my option positions. I have just a slight positive delta, which I may re-balance to a slightly negative delta depending no the open tomorrow morning.

Good luck to all this week! May we all profit.

The Credit Spread

The credit spread is a very popular options strategy that, not only allows you to collect premium, but also limits your risk should the underlying do the opposite of what you thought it would.

There are 2 types of credit spreads: Short put verticals, and short call verticals. They are also called bull put verticals, and bear call verticals. I like short put and short call better, so that’s what I’m going to use for this article.

Short put verticals are used when someone is bullish on the underlying; they’re hoping to profit if the underlying stock rises in value. On the contrary, a short call vertical is used when someone is bearish on the underlying; they’re hoping to profit when the underlying stock declines in value.

The general idea is to sell the more expensive option, and buy the less expensive option (both within the same expiration). Selling the more expensive option nets you a premium – a credit that you receive in your trading account. Buying the less expensive option provides you with “insurance” that caps your maximum risk on the trade.

So how do you enter a short put or short call vertical? Let me tell you…

For my example, I am going to use a hypothetical stock, and the strike prices will be 100 and 105. And, of course, the same expiration date will be used when I enter this trade. The 100 strike will be $5 and the 105 strike will be $3. I will not include any brokerage fees either. And yes, you will have some kind of brokerage fee I’m sure. With that said, let’s begin!

I am bearish on stock ABC, and I decide I want to enter a short call spread to collect premium. Currently, ABC is trading for $100 per share. So, I pick the 100 strike to sell, and the 105 strike to buy. When I sell the 100 strike (at the money) I collect the $5 premium (credit) that this contract was selling for. I simultaneously purchase the 105 strike (further out of the money) for a $3 debit. Note: 1 option contract is 100 shares, so multiply the premium by 100 to determine actual total cost. In this case it would be $500 collected (credit), and $300 paid (debit)

The full credit I receive is the difference between the premium collected, and the premium paid. In this trade that is $2 per contract ($5 credit minus $3 debit). The $2 credit is deposited into my trading account ($200 total for the one contract). But, of course, before I entered this trade I determined what my risk vs. reward was. And because spreads are defined risk, it was easy to do so.

The maximum profit potential is the credit that I received. In this situation, that was $200 ($2 times 100 shares). The maximum risk potential is the spread width (distance between strikes) minus the credit received. In this situation, the strike width was $5 and the credit was $2, so my max risk potential is $300 ($3 difference times 100 shares).

ALWAYS determine risk BEFORE entering a trade. This should be your first step in deciding if the trade is worth it.

So, if ABC stays below $100 per share by expiration, I will keep the entire credit of $200. Remember, this credit was pretty much automatically deposited into my trading account when I placed the trade.

But what if ABC rises above $100 per share by expiration? Well, a couple things: 1) Break even or 2) lose your max risk… Remember that premium I collected? Well, to find the break-even price for ABC (the price in which you will not lose any money, nor will you keep your credited amount) you simply add the premium collected ($2 in this case) to the lower strike price ($100 in this case)… to break-even, I need ABC to stay below $102 per share ($100 strike plus $2 premium collected). Should ABC rise above $105 per share, I will lose my maximum risk of $300.

If ABC stays between $102 (break-even) and $105, you will get to keep some of the premium you collected, but not all of it.

And that’s really it. Pretty simple! But remember, I entered this short CALL spread because I was BEARISH on the underlying. If I was BULLISH on the underlying, I would have entered a short PUT spread. The short put spread is done the exact same way in reverse.

With a short put spread, you sell the higher strike and buy the lower strike. And, to determine the break-even, you subtract the premium received from the HIGHEST strike. If you recall, with a short call spread, you sell the lower strike and buy the higher strike. And, for break-even, you add the premium to the LOWEST strike.

It’s important to note that there are many different ways you can enter spreads. For instance, you can focus on in the money, at the money, or out of the money options. You can also widen the strike width beyond the 5 wide example I used.

Before you place your first vertical spread trade, you MUST understand them 100%. Even though they are defined risk, and your loss potential is capped, it is still a loss that can happen.

To Short… What Does That Mean?

The concept of shorting really tripped me up when I first started investing. Before that, I always assumed the only way to make money investing, was to buy. You know – “buy low, sell high.”

But, what I soon learned was that “sell high, buy low” was also a very valid concept. In fact, once I figured this out, I knew that I was going to be able to make money regardless if the market was bullish or bearish. Of course, you still need to know what you’re doing… but in theory, money can be made in a bull or bear market; recession or crazy hot economy. Makes no difference.

But what is shorting? Short selling is the borrowing of shares from ones broker to sell in the open market, and buying those same shares back at a cheaper price and profiting on the difference. Let me explain:

Let’s assume I am bearish on company ABC (hypothetical company). I think they suck, and I think they will drop 5% in price within a week. Currently, ABC is selling for $100 per share. I want to short them, so I open a short position via my trading platform for 10 shares. When I “Sell to Open” via my broker, my broker then lends me the 10 shares I requested, and they are automatically sold on the open market for $1,000 (not including fees).

So, to recap: I borrowed 10 shares from my broker and sold them for $100 per share netting me $1,000 that is deposited into my trading account.

A week goes by and ABC stock did exactly what I thought they would – they tanked 5%. WOO HOO! What a great analyst I am! So ABC is now selling for $95 per share – $100 minus $5 (5% of $100) equals $95. I decide to close my position by placing a “Buy to Close” order.

Now I am buying back the shares that I borrowed, so I can return the borrowed shares to my broker. But, I am buying the shares back at a cheaper price than they were when they were loaned to me… so I get to keep the difference. I sold ABC for $1,000 (10 shares at $100 per share), and bought them back at $950 (10 shares at $95 per share) to give the 10 shares back to my broker. I get to keep the difference – $1,000 minus $950 equals $50. I just made $50, or 5% on my return. FANTASTIC!

The example I gave was for short selling stocks. However, there are other ways to short like buying put options. A put option… simply put (LOL LOL)… is an option contract that you purchase when you think the underlying is going to fall in price. But put options are for another article. Just know that with a put option you are not borrowing anything, rather, you are buying with your money a security that will allow you to profit when the underlying falls in price.

Understanding short selling broadened my horizon in terms of investing. With a good understanding of short selling, it is entirely possible to profit in a bear market, the exact same as you can in a bull market. But, like any other investment type, short selling carries certain risks that other strategies do not. As always, it is absolutely necessary for you to educate yourself on whatever you do BEFORE you do it when it comes to investing or finance.

Does Number of Shares Matter?

I can’t tell you how many times I am told that “Amazon is too expensive!” Or, “I can’t buy that, it’s too expensive. It wouldn’t be worth it.”

Time and time again, it never fails. But is a stock being “too expensive” a reason not to buy it? Here is the argument (usually) for not buying the stock because it’s too expensive: Because you won’t be able to make enough money, because you can’t buy enough shares.

Ok… So I’d be a liar if I said I did not think the EXACT same thing when I first started out investing. I thought you had to buy a million shares of something to make a good return. Until one day my dad said “you know a percent of $1,000 is the same regardless if it’s one share, or two, or three, etc… right?”

I was dumb-founded by such a ridiculous comment. “Ughhhhh!” I thought, “how dare he question my judgement.” After all, I was a brand new investor/trader and new everything already, DUH! I knew without a doubt that the more shares you had of something, the better off you were. I was sure of it… until… I thought about it.

Let’s use $1,000 as a nice and easy number. Assume that stock ABC (hypothetical company) is selling for $1,000 per share. And stock DEF (hypothetical company) is selling for a measly $100. Obviously I can make more money with 10 shares of DEF, than I can with one share of ABC, right??… NOPE! And here is why:

(Not including fees) I buy 10 shares of DEF at $100 per share, for a total of $1,000. You buy 1 share of ABC at $1,000 per share, for the same total – $1,000. A month later, both company’s stocks are up 15%. WOW! We nailed this trade. GREAT JOB! So who made more money? We both made the exact same amount… I know, right! Shocking!

Your 15% gain on 1 share of ABC is $150. My 15% gain on my 10 shares of DEF is also $150. Wow, who would have guessed!? See my point? It makes no difference what the share price is. The ONLY thing that matters… let me repeat that… the ONLY thing that matters is how much money you are willing to spend and/or risk. That’s it!

I bring this up because of Amazon – a very high priced stock, but a very good company (in my opinion). Amazon right now is selling for roughly $1783 per share. Would my money be better spent on 10 shares of something that costs $178 per share? Or even 20 shares of something that costs $89 per share? Or would my money be best spent by purchasing one share of Amazon? In the end the money spent is the same, the number of shares makes no difference at all.

Don’t let the price tag turn you away. Good solid company’s sell for whatever that good solid company sells for. Maybe there are GREAT stocks for under $100 (and there are, trust me). But maybe that $1,700 stock is also a really good buy. Always remember that the amount you have to spend and/or risk is all that matters. The number of shares you own should mean nothing to you.

Descending Triangle

I like to keep my charts simple – simple is better! There is no need for a chart to look like a laser-light show. So, my favorite chart patterns are the simple shapes: Rectangles, pennants, flags, and triangles. All are simple, and all are consolidation patterns waiting for a break-out.

Take this /CL chart I did today (/CL is oil futures). An almost perfect descending triangle has been in play since April.

Notice the lower-higs? Notice the major support on the bottom of the triangle? Ya, it’s pretty much a classic descending triangle. If I were to trade a descending triangle, I would simply sell at the resistance (top edge), and buy at the support (bottom edge). Does this mean I will make money? No, but it gives me better odds.

The thing about any chart pattern, is you have to make sure it’s going to end up like the pattern you think it’s going to be. If you notice, oil broke out of the triangle a month ago – that is when the Saudi Aramco attacks happened. But It soon came right back into the triangle, and eventually bounced off support once again. However, if you were bullish on the break out, you would have lost if you held your position. Just goes to show you that NOTHING is 100% certain.

I look for certain things when I think I see a triangle: 1) Has the triangle resistance and support been touched at least 2 times each? And 2) Is the size of the triangle relative to the chart size. What I mean is… if it’s a daily chart, and I think I see a triangle but it has only been in the making for a week or 2, I won’t play it. Notice the chart above has been in play since April – that’s pretty convincing to me.

Lastly, in general, descending triangles usually break to the downside once they break out of that pattern. The opposite is true for ascending triangles. Does it always happen this way? NOPE! Again, NOTHING is 100% in the market, which is why you must do your homework and stay diligent with your trades.

The Holy Grail of Strategies

Have I got some news for you or what!? Are you ready… are you sure? Here it is….

The Holy Grail may exist! Woo hoo! But, unfortunately, the Holy Grail of trading strategies, most certainly does NOT exist! I know, bummer, right?

Some claim to have the “perfect” strategy, or the “best” strategy, or the strategy that will make you a multi-gazillionaire over night. I got news for you – they’re lying!

There is no such thing as a perfect trading plan or strategy. If that existed, we would all win our trades 100% of the time, and we would all be wealthy beyond our wildest dreams.

But, the good news is that there are strategies that increase your odds. There are also ways to mitigate risks before you even choose the strategy you want to implement, and that is by utilizing solid analysis skills (doing your homework).

I never enter a position based solely on a “gut feeling.” I never enter a position based solely on “well, it’s gone down this far, it has to turn around.” Yes, I will admit, however, that I do sometimes think those things, but only AFTER I have done my other homework first.

I utilize both technical and fundamental analysis. Some people just use one or the other, and that is 100% OK. I just personally think that they work best when used together. One compliments the other, so to speak. In specific, I believe that technicals compliment fundamentals. What I mean by that is – technicals move based on the underlyings fundamentals. That’s just my opinion. It works for me.

Back to the “Holy Grail” of trading strategies… They don’t exist! You will NEVER find it! So stop looking. Instead, find a strategy that works for you. Make sure that strategy has logic and reason behind it, and make sure that strategy involves some kind of risk management. Over time, if your strategy is solid and it works, you should make money. Will you become a millionaire with it? I don’t know! It’s possible, of course. Anything is possible with hard work and dedication.

Ignore the people that say their strategy is better than yours, or they know more than you do. Blah blah blah! These people, in my opinion, have nothing of value to share with you. They just want to brag and sound cool, but probably are not as smart as they think they are. I’d rather follow the people who are humble and do not push their strategies on me. The people I like to follow have tons of information to share, and never brag about it.

For example: I “ran into” a gentleman in a Facebook group named Nicholas. He runs ‘Option Alchemist.’ He’s a very smart and humble options trader with many many years of experience navigating the markets. I have been talking to Nicholas for only a couple of weeks, but I have already learned quite a bit via “small talk.” These are the types I’m looking to learn from, not the bragger.

If you are interested, you can find Option Alchemist on Facebook, Twitter, and their website. Here are the links: Facebook, Twitter, and website.

Ok, my rant/lecture is done. I hope you gained some insight if you are a new trader. The market is full of gimmicks and “get rich quick” schemes. Ignore them. They don’t have the answer you’re looking for. They don’t have the Holy Grail!