Another week gone by, and another week of volatility compression in the books.
Since the rally late last year, we have seen a time-based correction. There are signs of a failed breakdown which lead to a retest of the upper end of the range, which I think has already been fulfilled.
It just seems like the market is waiting for something. A catalyst.
Now we’ve got stock earnings coming out now so that may act as something if a large firm reports numbers significantly different than what the market is pricing in.
And we’ve got US political risk with the changeover in the administration… but other than that I don’t see anything.
Which is a little concerning. When the risks aren’t super obvious and written in the headlines, that’s when we want to be a little cautious.
We also have the VIX at a floor and it’s been there for two months:
And stock correlations are pretty low:
This is a chart of the European markets and how sectors aren’t running on the same conveyor belt… I’m seeing the same here in US stocks.
For us, that’s great… it means that individual stock setups are still there and we can pull out a good income in the markets.
However… at some point a catalyst will come into play and stocks will start trading on the conveyor belt together. It’s probably too early to make that call but it’s something I’m watching and I wanted to bring to your attention.
Trade #1: HD
The stock has gone sideways for well over a month now. I suppose you could try and play the breakout, however I want to wait for a test of the low 130’s… previous pivot levels and a rising 50 day moving average come into play, making this a good risk/reward trade.
Trade Setup
Expected Price: 132.50
Sell to Open HD Mar 125/120 Put Spread
Tier 1: Open at 0.80, close at 0.30
Tier 2: Open at 1.10, close at 0.80
Tier 3: Open at 1.40, close at 1.10
Trade #2: TSLA
I’ll be completely upfront with you… I’m extremely hesitant to even suggest this trade. Shorting stocks has not been working and TSLA is a freight train right now.
However, the stock has rallied over 20% in the past month. This is normally the time momentum significantly slows down.
Now because this has earnings next month, I don’t want to put on anything too aggressive. This is a “whites of their eyes” trade where I only want to play it if it truly goes parabolic.
That means I need to see another 20 points out of the stock before I even consider putting on this trade.
Trade Setup
Expected Price: 250
Sell to Open TSLA Mar 285/290 Bear Call Spread
Tier 1: Open at 0.75, close at 0.25
Tier 2: Open at 1.05, close at 0.75
Tier 3: Open at 1.35, close at 1.05
Trade #3: GS
Large cap financials are all getting their earnings reports out of the way, and what I’m seeing so far is a lack of positive response after the earnings report.
While GS has yet to report, other names like JPM and BAC already have… so far they look like failed breakouts.
Given how far this sector has moved, it makes sense to anticipate a pullback. Be ready for a move to 230 quickly and start fading it there.
Right now March options aren’t open, but they will be at the end of the week. I’ll plan a trade with April options, but move to March if it isn’t filled this week.
Trade Setup
Expected Price: 230
Sell to Open GS Apr 205/200 Put Spread
Tier 1: Open at 0.80, close at 0.30
Tier 2: Open at 1.10, close at 0.80
Tier 3: Open at 1.40, close at 1.10