Stocks opened lower as expected and crashed -2.40% on virus fear. This makes the market correcting another 7.5% within the original 10.6% correction. Kind of a correction inside a correction since we haven’t fully recovered from the first one.
This also breaks all previous patterns (unless we recover by the end of the day) and makes the double top pattern more likely.
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On Thursday, big names are reporting earnings… AMZN, AAPL, GOOG, GOOGL, and FB… and these companies can shake the market for sure. I think the best one can do is to stay away for now until we see what is going to happen.
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Selling in Wall Street is set to continue tomorrow. On Monday we saw the indexes declined (SPY ended the session down 0.33%) and the negative sentiment seem to continue. The futures pre-market data indicate the DJI to drop even more. As of now the opening will be down more than 300 points or -1.14%.
Of course, a lot may change before the cash trading starts on Tuesday morning, however, we seem to gap down and accelerate.
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The stock market was forming a cup and handle formation, but yesterday, this pattern failed.
If we were to continue the pattern, we were supposed to continue higher as indicated in the picture below:
Since this pattern failed, what is ahead of us now?
We can see or identify two other possible patterns:
1) A double top formed and we may see the price to go down to 200 DMA
The double tops are rare and do not occur very often (no matter how much others on Facebook tell you otherwise). And even if they do occur, experienced chartists say that they are not very reliable patterns. Why? One reason is that it is very typical for the price to get some harsh time at the top resistance and it may take a few attempts for the market to break that resistance. Thus the price stalls once or twice, sometimes three or four times before it breaks up. Short term, you may identify it as an intermediate movement stop with a small pullback but definitely not a major trend reversal. You may look at the double top as a consolidation pattern rather than a major reversal one. Most of the time. Sometimes, it will not work as consolidation, and the price crashes. If this is the case today, we may see some violent downturn down to the 200-day moving average:
Given the election is in a week, after that, we may expect stimulus to pass, the market may recover from this pre-election weakness and continue higher. If that is the case (and I think it is), then the second emerging possible patter is the one in play:
2) An upward sloping triangle
This pattern seems more probable but we will have to wait for the resolution. If this is really in play, we are not out of the woods yet, the market may continue in a zig-zag move for sometime before we find out whether we break up, or down.
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If you are familiar with this strategy, you can pretty much skip this post as you already know all the ropes. If you are a novice investor, this strategy may help you maximize your returns.
This strategy utilizes trading stocks and options. I use this strategy myself and it generates consistent returns.
Stock pick criteria
To trade this strategy I pick a stock which is relatively lazy (so doesn’t have too much volatility in it), trades mostly sideways or slightly up, pays dividends consistently (dividend aristocrat), and I must be willing to buy 100 shares of this stock (that means, I have to have enough money in my account to do so). The best candidates are usually utility stocks but any stock with lazy charts will do it. I also check options on that stock to make sure it has enough premiums trade.
Trading the strategy
Once you have a stock that meets your criteria, start doing the following:
1) Sell a put contract with delta 20 – 30 (that will determine your strike price), a premium of 0.30 ($30) or more, and 45 days to expiration or shorter if you can get the same premium.
2) Reinvest the premium and buy one share of the stock you traded (if the premium is less than the stock price, leave it in cash).
3) If the stock stays above the strike price at expiration, it will expire worthless, you keep the premium, and go back to step #1 above.
4) You may apply a 90% rule which means that you buy back the option once you achieved a 90% premium, e.g. you sold the option for 1.00 ($100) and buy it back for 0.10 ($10). This means you skip step #3 above.
5) If the stock stays below the strike price at expiration, you may attempt to roll it into the next expiration day and the same strike, or into the next expiration day and higher, as long as the roll is a credit roll. If this is not possible, let the option assign and buy 100 shares of the stock.
6) Once you have the stock, sell a covered call option. Make sure your strike is above your cost basis. For example, if you were assigned at $30 a share, make sure you sell the call with a strike price of 30 or more. Note, there will be situations when the stock drops so low that this will not be possible, but there are strategies to go around this. If interested, I can write about it in another post.
7) Reinvest the premium from covered call trade and buy another share of the stock. Also, in this period, you will start collecting dividends. Reinvest the dividends to buy more shares.
8) If the stock stays below your call strike price at expiration, the call will expire worthless and you can go back to step 6 above.
9) You can also buy the call back once you reach 90% profit on the call and sell a new call with the next expiration day, (i.e. skip step 8 above).
10) If the stock ends above your short call at expiration, you can roll the option into the next expiration and same strike, or next expiration and higher strike as long as it will result in a credit trade.
11) If the roll as described in the step above is not possible, let the call assign, and sell your shares. If done as described above, you will make a profit on the calls and on the stock. Once you have no shares, you can go back to step #1 above.
That’s it. If done correctly, this strategy is almost invincible and you will be making nice profits. If you need more help, let me know.
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Stimulus hopes before the election fade away and investors are dumping stocks (but wait, they will be buying it back like crazy when the hopes renew after the election)…
A good start on vaccine hopes diminished on the stimulus failed hopes. But who knows what the hopes are. It is all that media make always up to come up with to justify the market price action.
My view is that every storm on Wall Street is a storm in a spoon of water inflated by media and panicking investors who are extremely short term oriented. And many lose money because of it which boosts their “I told you so” posture when talking about the markets.
Ignore it, execute your plan and you will perform better. A lot better!
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We had a few options positions expiring last week on Friday, October 16:
PPL – Oct 16 (monthly) 29.00 call for +0.35 – WINNER
STOR – Oct 16 (monthly) 25 put for +0.68 – WINNER
All other trades were rolled into November expiration day.
You can check our open positions on our Trades & Income page.
Last week was successful in spite of the market decline which I have expected anyway. It allowed us to roll a few trades into a better strike, for example, our IWM trade which went up so much that we weren’t able to roll it higher fast enough.
We generated $167 dollars in options premiums last week and $98 dollars in dividends. All income was reinvested into new stock positions according to our plan.
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1) You can generate great returns
2) You can treat investing and trading as your business
3) You do not need customers
4) You do not need supplies
5) You do not need any marketing looking for customers, and keep them happy mainly when they do not know what they want
6) You do not have to deal with competition, there is none
7) You do not need any manufacturing, rent buildings, offices, warehouses, you do not need a third party like Amazon to sell your product
8) You do not need any product, after all, you do not need to spend time searching what to sell, what to make, what to manufacture, and you do not need to beg for startup money
All you need is a computer or laptop, a brokerage account with full trading privileges, and $2,000 to start with. You are free, you have no boss, no partners, no investors to answer to. You have full-time freedom.
People think investing and trading in the stock market is a bad proposition because the market only makes 8% a year… Those who claim and believe this probably never actively traded in the market and have no clue what they are talking about. These people should stay away from the market because thanks to their own false beliefs they predetermined themselves to failure before they even started.
I am not a guru or great in investing and trading. I make mistakes, but I believe in tremendous freedom trading offers. I started trading in 2014 and averaged 45% annual returns except 2018 and 2019 where I had losses of 33% and 24% respectively. However, 2020 was a very good year. Despite covid troubles and selloffs, I am currently at 157% revenue.
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As expected, the market topped in a parabolic run-up a few days ago and retreated.
It is possibly creating a cup and handle formation and if completed and correct, we may expect another leg up:
Cup and handle and all charting is not an exact science. But if we take into account what an ideal cup and handle looks like, or should look like, the market is currently behaving to confirm this pattern.
When we create a cup, the handle should be about 30% of the rally from the bottom of the cup. So, if we agree on the bottom to be at 3230 level (again, not an exact science), and the top of the cup at 3550, then 30% of this rally is 96 points (3550 – 3230 = 320 * 0.30 = 96). Subtract 96 from 3550 and you get 3454 level.
Today, the market dropped to the 3440 level and bounced back up. If this level holds and the market starts going higher, we can conclude that we had a successful cup and handle formation and we would go higher from here.
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The stock market can be compared to a sprint in athletics. When runners are running they run at a constant speed but as the finish line nears they start adding speed and take their reserves of energy to sprint faster to the finish line.
Yesterday, the market started showing the signs of a sprint. Today, we stalled and we had a 0.61% pullback. Is this a beginning of a bigger pullback or just a blip? I want to think we will see more and I wish we do as I have a few positions which I would like to adjust and a pullback would offer a great opportunity to do so.
But, we would have to wait and see what this market wants to do next.
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