Overbought markets continue to get... well, more overbought.
This is the strongest trending move we've seen in 20 years. Odds are the correction we see will be sideways and rotational in nature. Yes, I'm concerned about "the rug pull" yet if you had tried to trade based off that concern for the past few months... it really hasn't been a good trade to take.
We're headed into earnings season. Much of the "good news" in these stocks has already been priced in, so it's reasonable to expect the momentum in the market to wane as we find out whether the fundamentals of companies align with the ramp that we've seen higher.
There's two themes I see right now.
The first theme is the "short squeeze." Now I don't think that there were any aggressive short sellers in this market. Instead you have a different dynamic, with traders who were short calls or other kinds of gamma who are getting squeezed. I know, because I'm one of them! When you buy back calls or hedge against short gamma that adds fuel to the fire and helps to reinforce price action higher.
That's a small reason, but not "the" reason we should focus on.
The second theme is inflation. It's back, in a big way. The main thing to watch here is the dollar.
The correlation between the dollar and stocks isn't always inverse... but during "inflationary" markets it is. We're in the late stage of the cyclical bull market and commodity stocks are starting to matter more and more. When the dollar is weak the market is strong, and vice versa. I don't see that theme going away anytime soon.
Yesterday, there was a capitulative breakdown in the dollar. If we see a bounce from that, then the "inflation" theme will take a break, which will lead to that sideways market correction I've been looking for.
Trade #1: ADBE
The stock had an exhaustion gap higher on Tuesday, and I am looking for a deeper pull back into 193, which is previous support and key moving average support.
Trade Setup
Expected Price: 193
Sell to Open ADBE Mar 175/170 Put Spread
Tier 1: Enter at 0.70, Exit at 0.20
Tier 2: Enter at 1.00, Exit at 0.50
Tier 3: Enter at 1.30, Exit at 0.80
Trade #2: TXN
Pretty nasty move on earnings for TXN. I never fade the first move lower, but if we get that second move, that's going to be a good low-risk entry point for some bull put spreads.
Trade Setup
Expected Price: 105.52
Sell to Open TXN Mar 97.50/92.50 Put Spread
Tier 1: Enter at 0.60, Exit at 0.10
Tier 2: Enter at 0.90, Exit at 0.40
Tier 3: Enter at 1.20, Exit at 0.70
Trade #3: GLD
The way that gold is trading right now... it's a dollar proxy play.
Yes, I know that there's the potential for a longer term pattern playing out in gold, yet to see this kind of gap higher after a strong move into resistance, the odds of momentum continuing like this is low. It would require a mini-crash in the dollar for gold to jam above 132 in the near term.
Nevertheless, I've been absolutely smoked before on trying to fade gold... so I'm going to wait for a move above Wednesday's highs for an entry.
Trade Setup
Expected Price: 129.31
Sell to Open GLD Mar 134/137 Put Spread
Tier 1: Enter at 0.40, Exit at 0.05
Tier 2: Enter at 0.55, Exit at 0.25
Tier 3: Enter at 0.70, Exit at 0.45