Proactive Spreads Newsletter

The rotational correction is still going on. S&P looks healthy due to having exposure to energy, industrials, and banks. Nasdaq looks "OK" and the Russell 2000 has a key support level that's holding... for now.

Yet there is a new class of investor/trader that doesn't see it that way. Their portfolios have been cut by a massive amount due to overleverage in tech momentum, pot stocks, solar plays, and whatever their chat room pumper sent them.

Those names look tragic, and they probably won't get off the mat for a while.

To bookend the most recent drama, we find out over the weekend that a family office is overleveraged in tech CFDs... to the point that it represents a systemic risk to some banks.

Now, I don't think that news is super bearish. In fact, the news coming out probably means that the bloodbath is about over. Names like BIDU and VIPS already were smashed, and now we have a narrative to attach to price action.

With that news, I am OK putting risk on some of these broken momentum names. Our other two plays will be simple relative strength setups.

Trade #1: ARKK

ARKK is the tech momentum darling fund. And for the past few months, it's doing what tech momentum does best-- rally 50% then drop 50%.

We're coming back into the impulse lows, and the rising 200 day moving average just at 110. My feel here is that we can break the most recent low, do a stop run, and reverse higher. This is a classic "momentum divergence" setup and we will start scaling in here and adding into that.

Trade Setup

Expected Price: 111.3

Sell to Open ARKK 21May21 95/90 Put Spread

Tier 1: Enter at 1.00, Exit at 0.32

Tier 2: Enter at 1.4, Exit at 0.68

Tier 3: Enter at 1.8, Exit at 0.9

Stop Out If Close Under 94.89

Trade #2: TGT

Solid move off the lows in TGT, and the negative earnings reaction was swiftly taken out and the stock is now at new all time highs. I like entering here and scaling into pullbacks.

Trade Setup

Expected Price: 199.84

Sell to Open TGT 21May21 185/180 Put Spread

Tier 1: Enter at 1, Exit at 0.32

Tier 2: Enter at 1.4, Exit at 0.68

Tier 3: Enter at 1.8, Exit at 0.9

Stop Out If Close Under 184.89

Trade #3: CSCO

CSCO is another name that's hitting new local highs-- I'm not sure if it's all time highs because it's CSCO and there are levels back from 1999 that may be coming into play.

Either way, I want to play it on the first pullback. Due to the duration of our trade, there is the potential for earnings risk and we will keep an eye on it into earnings-- if we don't have enough of a cushion on the trade, then we will close out for breakeven to avoid that risk.

Trade Setup

Expected Price: 51

Sell to Open CSCO 21May21 48/46 Put Spread

Tier 1: Enter at 0.42, Exit at 0.15

Tier 2: Enter at 0.588, Exit at 0.29

Tier 3: Enter at 0.756, Exit at 0.4

Stop Out If Close Under 47.89

The S&P had another rug pull on Monday-- great way to start the new year!

Overall, things are "fine." The only major warning sign was the fact that Monday's range was more than a 2 standard deviation move-- when there are volatility pivots like that, there is a tendency for the "impulse" low to not be the final low. We could easily crack 3650, get a bunch of investors spooked, and start carving out the lower end of a range-based correction.

Or we could continue with the Q4 2020 playbook and it can be a one-off event as we jam to new highs.

For today, our focus will be planning for a few things.

First, we want to be ready for the dollar to hit a cycle low. It's extended, and any pop should lead to some reversion in commodities. We'll also be looking for rug pulls in two tech/momentum names.

Trade #1: GLD

Trade Setup

Expected Price: 180.38

Sell to Open GLD 19Feb21 172/169 Put Spread

Tier 1: Enter at 0.56, Exit at 0.14

Tier 2: Enter at 0.784, Exit at 0.33

Tier 3: Enter at 1.008, Exit at 0.44

Stop Out If Close Under 171.89

Trade #2: ATVI

Looking for a pull to the 20 day moving average, prior resistance, and support from the candlestick wicks from 2 weeks ago.

Trade Setup

Expected Price: 88.25

Sell to Open ATVI 19Feb21 80/77.5 Put Spread

Tier 1: Enter at 0.43, Exit at 0.07

Tier 2: Enter at 0.602, Exit at 0.22

Tier 3: Enter at 0.774, Exit at 0.28

Stop Out If Close Under 79.89

Trade #3: PENN

Looking for just a little bit more downside here. I may have missed the short term bottom, but if it goes on one last stop run to attempt a test of prior resistance, I want to be involved.

Trade Setup

Expected Price: 78.5

Sell to Open PENN 19Feb21 70/65 Put Spread

Tier 1: Enter at 1.05, Exit at 0.37

Tier 2: Enter at 1.47, Exit at 0.76

Tier 3: Enter at 1.89, Exit at 1.01

Stop Out If Close Under 69.89

Not much has changed about the overall market structure. Unless we see proper price violations, we should consider the trend to be up.

There are some "hot spots" in the market right now-- semiconductors and commodity stocks come to mind-- so we may simply see a rotational correction. There is some risk right now as the PFE news came out about vacc*ne supply delays, yet if that doesn't cascade over the next few trading days it should be fine.

(Yes, I am censoring the word, just so I make sure this email lands in your inbox properly.)

Overall, try not to overthink this market. My bet is that corrections will be limited to pockets of the market, and volatility will continue to head lower as we come into holiday trading.

Trade #1: XLNX

Very clean move over the past week, look for rotation lower as some other semiconductor companies take the lead. First dip in this stock should be a quality one.

Trade Setup

Expected Price: 136.59

Sell to Open XLNX 15Jan21 120/115 Put Spread

Tier 1: Enter at 0.94, Exit at 0.24

Tier 2: Enter at 1.316, Exit at 0.57

Tier 3: Enter at 1.692, Exit at 0.76

Stop Out If Close Under 119.89

Trade #2: SPG

If commercial real estate gets another whiff of good news, SPG will jam higher and (finally) fill the gap from March. Once it does, I want to fade it.

Trade Setup

Expected Price: 100

Sell to Open SPG 15Jan21 110/115 Call Spread

Tier 1: Enter at 1, Exit at 0.32

Tier 2: Enter at 1.4, Exit at 0.68

Tier 3: Enter at 1.8, Exit at 0.9

Stop Out If Close Over 110.11

Trade #3: SHOP

Got a lot of eyes on this one, looking to chase a breakout. My guess is we need one more washout before the big move comes, and I want to be prepared to play the dip into key levels.

Trade Setup

Expected Price: 1020.42

Sell to Open SHOP 18Dec20 975/970 Put Spread

Tier 1: Enter at 1.35, Exit at 0.72

Tier 2: Enter at 1.89, Exit at 1.26

Tier 3: Enter at 2.43, Exit at 1.71

Stop Out If Close Under 974.89

Not much to say today, as in previous PS newsletters we've laid out all the clear risks in the market.

Let's keep it simple-- the longer we hold above 3500, the higher the odds for trend continuation.

And today was a "piercing pattern," meaning that the gap down and probe lower was met with aggressive buyers. I'd prefer a deeper pullback, yet it's still a very strong market.

At what point do we top out? When enough hedging has been burned off. The VIX is still in the 20s as investors are still scared about the 'rona and the fiscal deal that seems to never come around. Once we process through those risks, that's when we can start getting a touch more aggressive with selling call spreads. Until then, we need to work with any dips the market will give us.

Trade #1: VZ

This is a bit more of a "boring" setup as Verizon is not traditionally a fast moving stock. Because of this we will look at Jan opex for our trade setups.

The stock is flirting with new highs, but more sellers need to get cleaned out first. I want to see an attempt of that gap fill to initiate a position.

Trade Setup

Expected Price: 59.47

Sell to Open VZ 15Jan21 57.5/55 Put Spread

Tier 1: Enter at 0.51, Exit at 0.17

Tier 2: Enter at 0.714, Exit at 0.35

Tier 3: Enter at 0.918, Exit at 0.46

Stop Out If Close Under 57.39

Trade #2: TSLA

TSLA finally saw the move out of consolidation. The news of S&P inclusion was the catalyst, yet that has been telegraphed even since August.

Technically, we look for continuation, and I'll be rooting for a pullback to participate in some spread sales.

Trade Setup

Expected Price: 476.54

Sell to Open TSLA 18Dec20 400/396 Put Spread

Tier 1: Enter at 0.78, Exit at 0.23

Tier 2: Enter at 1.092, Exit at 0.5

Tier 3: Enter at 1.404, Exit at 0.67

Stop Out If Close Under 399.89

Trade #3: DIS

DIS is most likely establishing a "base on base" pattern, creating a new range against the most recent volatility pivot higher. It will probably be a sloppy mess given it's a proxy to the 'rona, yet I think the most recent levels at 135 will hold pretty well.

I'm looking for a deeper dip here as it fills the gap from last week.

Trade Setup

Expected Price: 138.34

Sell to Open DIS 18Dec20 130/125 Put Spread

Tier 1: Enter at 0.83, Exit at 0.12

Tier 2: Enter at 1.162, Exit at 0.39

Tier 3: Enter at 1.494, Exit at 0.5

Stop Out If Close Under 129.89

Another weekend, another vaccine trial result. This time it's Moderna, which is claiming a 95% success rate.

This is helping the overall psychology of the market. Instead of worrying about the third or fourth waves, institutions can now start modelling their risk with more clarity.

The market hates uncertainty. The transition from an uncertain narrative to a certain one is where market rallies happen, and I think we're well into one.

A big key that I saw last week is how well some sectors held their gains. Financials didn't fall apart, smallcaps kept the Monday low, and airlines... that's right, airlines of all places didn't fall apart on Monday's parabolic spike.

In the face of case spikes in Europe and the Northeast, markets held firm. That's a signal! When an obvious bearish narrative isn't confirmed by price, that's where we see continuation as the market is pricing in something different than the prevailing narrative.

Are we close to an intermediate term top in stocks? Maybe, but probably not.

The market loves certainty, yet there comes a point in time where if all the risks are effectively discounted, then nobody will get paid to hold into a low risk environment. That's where tops can happen, and we aren't there yet.

The VIX is still in the 20s. Until that really starts getting hit and no investors are buying hedges, we must assume overall trend continues higher.

Trade #1: BABA

Alibaba has not had a good run over the past few weeks. The "Singles Day" in China turned out to be good sales numbers, but that wasn't the reason it's been weak.

"Ant Group" was supposed to IPO and was 86'd by the Chinese authorities. Color me shocked.

Jack Ma is involved in the IPO and BABA owns a third of ant. It was supposed to be the largest IPO since Sauidi's Aramco. But the CCP pumped the brakes on the whole thing because it's what they like to do when someone like Jack criticizes the CCP banking system.

Technically, the stock is oversold. I think there is enough of a support level coming in from the rising 200 day moving average and previous support that we can get away with selling some put spreads here.

Trade Setup

Expected Price: 258.38

Sell to Open BABA 18Dec20 230/225 Put Spread

Tier 1: Enter at 0.72, Exit at 0.05

Tier 2: Enter at 1.008, Exit at 0.21

Tier 3: Enter at 1.296, Exit at 0.26

Stop Out If Close Under 229.89

Trade #2: PDD

PDD had a very nice move higher on the back of good earnings. It saw a second day push and got ahead of itself. I still like it short if it can reclaim Friday's close.

Trade Setup

Expected Price: 153

Sell to Open PDD 18Dec20 180/185 Call Spread

Tier 1: Enter at 0.8, Exit at 0.08

Tier 2: Enter at 1.12, Exit at 0.34

Tier 3: Enter at 1.44, Exit at 0.44

Stop Out If Close Over 180.11

Trade #3: MU

MU is breaking out to new highs on volume. We can get away with following the trend on this one.

Trade Setup

Expected Price: 61.5

Sell to Open MU 18Dec20 55/52.5 Call Spread

Tier 1: Enter at 0.34, Exit at 0.03

Tier 2: Enter at 0.476, Exit at 0.06

Tier 3: Enter at 0.612, Exit at 0.08

Stop Out If Close Over 54.89

When the markets saw that massive gap higher on Monday, it was sold for the entire day. 

Normally, when we see a range breakout that fails, there is a tendency for price to trade down into the other end of the range… that would be 3200 on the SPX.

I’m not sure we will easily see that. We might, eventually, but odds are it won’t be a “hot knife through butter” kind of move. 

I’ve been wrong on that one before, and I’ll talk about the primary risk in a moment, but first let’s think of the risks that are getting cleared out.

First, the elections. Unless something truly comes out of nowhere, the presidential election is done, and that can get priced into the market fairly quickly. 

There’s a senate runoff in Georgia that markets may start focusing on. Remember-- markets have a tendency to attach a narrative to price action only after the move has started. See the selloff in ZM and how it happened before the vaccine news came out.

But that’s a ways off, and we’ve got other near term risks the market is currently focusing on.

The next risk is going to be in a fiscal deal… if it ever gets done. 

We’ve seen plenty of times in the past where the stock market will throw a “temper tantrum” in response to a lack of fiscal or monetary policy. Oct-Dec 2018 come to mind, as does the “taper tantrum” in 2016.

The longer we go on without any fiscal stimulus, the higher the odds that vol will continue to pick up.

Third risk is the disease-that-shall-not-be-named. You know the one, and I’m trying to not say the name so this note can reach your inbox easily.

The ‘rona is in a family of viruses that exhibit a clear seasonality, and this has been known for a while. It’s not a surprise that cases are starting to pick up in Europe and the Northern US.

We’re now seeing policy responses to that increase in aggression. NY state is now telling people to keep fewer than 10 people indoors. Chicago is asking folks to cancel their thanksgiving plans.

If the lockdowns increase, then that will combine with the lack of fiscal stimulus and can create a “tantrum.” That’s how we can see hot-knife-through-butter price action.

Have I got you good and scared yet? 

Here’s the good news. 

All the election hedges that investors put on are still on. That means downside can be capped as these hedgers start to unwind their positions into any further selling. When that happens it can create a natural floor in the market as we go back into balance.

Clear as mud, right? That’s pretty normal.

Current focus is the first quality pullback in relative strength names. 

Trade #1: UBER

UBER had a monster run post earnings that was punctuated by a blowoff top on Monday. I'm looking for a full gap fill from Friday's close as a place to start a position.

Trade Setup

Expected Price: 44.53

Sell to Open UBER 18Dec20 40/37 Put Spread

Tier 1: Enter at 0.47, Exit at 0.03

Tier 2: Enter at 0.658, Exit at 0.18

Tier 3: Enter at 0.846, Exit at 0.23

Stop Out If Close Under 39.89

 

Trade #2: LRCX

Along with the rest of the semiconductor space, Lam had a nice move higher. We've got a gap fill and previous resistance in the 380s as a place to start from. This one is a little less liquid, so please double check prices as we come into that level.

Trade Setup

Expected Price: 383

Sell to Open LRCX 18Dec20 350/345 Put Spread

Tier 1: Enter at 1.15, Exit at 0.49

Tier 2: Enter at 1.61, Exit at 0.93

Tier 3: Enter at 2.07, Exit at 1.24

Stop Out If Close Under 349.89

Trade #3: GOOGL

This setup in GOOGL is probably wishful thinking, but I'm looking for a test of the earnings high and the rising 20 day moving average.

Trade Setup

Expected Price: 1660

Sell to Open GOOGL 18Dec20 1520/1510 Put Spread

Tier 1: Enter at 1.75, Exit at 0.34

Tier 2: Enter at 2.45, Exit at 0.94

Tier 3: Enter at 3.15, Exit at 1.23

Stop Out If Close Under 1520.89