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Proactive Spreads, February 16th 2017 – NVDA, NFLX

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When the market is in an uptrend, I try very, very hard to not be a contrarian. To let the trend ride and not second guess when the turn is coming.

Yet we are seeing some short term overbought signals that suggest a correction is due.

The main short term signal I see is the TurningPoint indicator on the chart above. Over the past 5 days the S&P 500 is up over 2.3%. Relative to what we’ve seen in the past, that may not seem like a lot. But there are two things to consider.

First is the vol over the past 3 months. It’s been very quiet, so we are actually hitting 2-std-dev levels… that means in the grand scheme of things we’re not overbought but when we use the past 3 months as a reference, we are quite overbought.

The second is if you go and look at the times the S&P has moved like this before, it tends to be after decent selloffs. This is an instance where we are breaking out at the highs. The market doesn’t have the “rubber band” snapback energy like it does on oversold levels, which makes this an even clearer signal.

Now in terms of a correction… what can we expect? There are three ways a market can correct… price, time, and momentum. Odds are we see another time based correction with maybe one shakeout. Unless the market can convincingly hold under 2300 then we should not expect the momentum to shift to the downside.

Trade #1: NVDA

Earnings are out and it had a failed gap higher into resistance, leading to more downside continuation. That kind of disappointment will bring in more sellers and we’ll see the lower end of the range tested. I want to see a new marginal low at 95 to start looking for an entry.

Trade Setup

Expected Price: 95

Sell to Open NVDA Apr 80/75 Put Spread 

Tier 1: Open at .60, Close at 0.20

Tier 2: Open at 0.90, Close at 0.60

Tier 3: Open at 1.20, Close at 0.90

Trade #2: NFLX

If a pullback does come, we have a rising 50 day moving average and an earnings gap fill right at 135. That’s where I want to take a position.

Trade Setup

Expected Price: 135

Sell To Open NFLX Apr 115/110 Put Spread

Tier 1: Open at .60, Close at 0.20

Tier 2: Open at 0.90, Close at 0.60

Tier 3: Open at 1.20, Close at 0.90

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