Markets look set to roll over. Again. The guidance from AAPL took tech down and the S&P really could not catch a bid today.
For now, trading around volatility is the name of the game. That means individual stocks will be influenced mostly by broad market movements, and there will be opportunities in non-stock assets, like bonds and gold.
Yes, it is reasonable to expect some back and fill after last week’s fireworks. The Dow had about a 1000 point reversal higher, so it makes sense for a little back and fill. Yet if you want to be bullish on the market… or at least for a push to test 2600… you do not want to see prices stay here for very much longer.
One thing to keep an eye out for is stock dispersion. High volatility markets means that all stocks are moving in lockstep– yet if we start to see rotation, that’s a healthy sign. An example would be if a stock like AAPL takes tech down, but large cap energy and financials stay bid. Low dispersion means stock picking gets a little more popular and overall volatility comes down.
We’re not there yet. Which means you can trade credit spreads, but you gotta pick levels that are serious stretch levels. And aggressively scale in and out, as we always have.
Trade #1: TLT
After it looked like yields were going to skyrocket higher in October, the flight to safety trade is back on. Investors are plowing their way into bonds… not just long duration like TLT, but mid and short duration (see IEF and SHY).
Parabolic spikes in TLT are similar to parabolic drops lower in SPX. It is a fear-based trade and has a high odds of reversion once the panicked buyers all wash out.
I’m looking for a gap fill back up at 125.
Expected Price: 125
Sell to Open TLT 129/132 Call Spread
Tier 1: Enter at 0.32, Exit at 0.02
Tier 2: Enter at 0.52, Exit at 0.22
Tier 3: Enter at 0.72, Exit at 0.42
Trade #2: GLD
Similar setup as TLT – investors are fleeing to gold due to recession and geopolitical concerns. We don’t care if it’s right– we care about what happens over the next month. I’m looking for a push into the gap fill from June of this year to start fading it.
Expected Price: 123.30
Sell to Open GLD Feb 128/131 Call Spread
Tier 1: Enter at 0.35, Exit at 0.05
Tier 2: Enter at 0.55, Exit at 0.25
Tier 3: Enter at 0.75, Exit at 0.45
Trade #3: UAL
The stock is barely holding onto support while the rest of the market is currently in a higher low. This has to do with bad numbers coming out of DAL.
I want to see a gap fill from the ramp higher in July to get involved.
Expected Price: 72.62
We don’t have spreads listed so we will update if price gets closer.
Trade #4: DIS
Just in case, I want to be involved if DIS comes back into 100.
Expected Price 100
Sell to Open DIS Feb 85/70 Put Spread
Tier 1: Enter at 0.80, Exit at 0.30
Tier 2: Enter at 1.10, Exit at 0.60
Tier 3: Enter at 1.40, Exit at 0.90