Last week, I made a note of the 2700 level.
The longer we held above 2700, the higher the odds we see continuation higher.
Well, that level was lost. Swiftly. The main driver appears to have been some sketchy action in Italian debt– the 10 year got above 3%, and it was the largest move in years.
I’m now watching Italian debt to see if it will hold these levels, and also Spanish yields… if those start to spike then we’ve got our regularly scheduled Summer Eurozone Crisis on our hands. It’s not new, it used to happen every summer until the ECB took an “elephant gun solution” and monetized all the debt.
As for now, I’m not too worked up about it. The markets, for the entire year, have been in a volatile, high-reversion range. This is more of the same. In the S&P there is currently not enough price discovery to say where this market is headed.
If the market were to see a swift rejection of this selloff and a recapture of 2700, then that would indicate there are enough buyers to take us to 2800.
Yet if 2700 doesn’t hold, then the “point of control” the buyers had has been lost and we’re just headed back into the range.
One key metric to watch is the 200 and 50 day moving average. If they cross, it’s called a “death cross” and while I don’t think it’s a huge deal, it could be one of those instances where it becomes a self-fulfilling prophecy.
I still think the S&P 500 makes new highs, eventually. This goes back to the massive move we saw at the beginning of the year… when you see “breadth thrusts” like that, they tend to come with a test of that high with a momentum divergence. I’m not expecting a collapse here… if the market does selloff it will be more in the form of a “stop run.”
Trade #1: BABA
BABA has atttempted to clear the 200 level, what is that, 9 times now? This has all the looks of buyer stubbornness followed by exhaustion. If 200 can’t be overtaken, then I think a retest of the lower and of the range and a little more is due.
There is a gap fill still open just under 190. That’s where I want to get involved.
Again… if BABA somehow rips to 220, I won’t be involved, but that’s the game… and then we can look for a different setup in the stock.
Trade Setup
Expected Price: 195.35
Sell to Open BABA Jul 175/170 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 #2: TLT
Along with the massive spike in Italian yields came with a massive drop in US yields. This is clearly “risk off” action in the bond market.
Now here’s what I see. The “short bond” trade has been obsessed over by investors and traders for the entire year. And in may, it looked like the short bond play was finally going to work. A lower low and a breakdown.
And then the breakdown failed. And then the market ran to the other end of the range. A MASSIVE short squeeze.
As an aside… pay attention to this pattern! It happens a lot — failed breakdowns lead to moves to the other end of the range.
I don’t think the short squeeze is done. I want to see a move to test the range lows of last year and then start to fade this move.
Trade Setup
Expected Price: 123.34
Sell to Open TLT Jul 127/130 Call Spread
Tier 1: Enter at 0.33, Exit at 0.08
Tier 2: Enter at 0.48, Exit at 0.18
Tier 3: Enter at 0.63, Exit at 0.33
Trade #3: GS
I’m going to anticipate capitulation in GS. We’ve done that once already, last month when GS tanked sub 230 and bounced hard. Now I’m looking for something similar as it fills the gap from Sep 2017.
Trade Setup
Expected Price: 221.04
Sell to Open GS Jul 205/200 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