Price is the only indicator you need. Most other indicators use some form of price and report on what has already happened, meaning the majority of indicators lag the information you already know. And yet people get wrapped up in MACDs and RSIs and Volatility Bands, and so on.
You just need to know how to read price action – and I’m by no means saying that’s an easy thing to do. I understand why people like the comfort of an indicator. But I bring this up because we’ve been hearing so many bearish stories about a recession, about a banking crisis, about a slowdown in earnings growth, and so on. Heck, I’ve even said some of the same things.
But what is the market showing you?
Here’s JPMorgan (JPM): It’s not only above its 50-day moving average, but it has been up until the banking nonsense that came out, but earnings came out strong and showed that the big banks can roll with the punches.
And what about Netflix (NFLX) with their earnings miss? I mean, an earnings miss during a dire time in the market with a looming recession means NFLX surely tanked, right? Not so fast.
First quarter earnings have been defying analysts’ warnings so far. Of the 30 companies out of the S&P 500 that have reported earnings, 90% have beaten earnings per share estimates, while 73% beat sales estimates.
I’m not saying it’s time to go all in, especially with the S&P 500 at an earnings multiplier of over 18, but you have to trade the hand you’re dealt and right now, the impending drop in the market hasn’t happened. We haven’t retested the October lows. The market hasn’t dropped 20% in a week, as some outlets projected would happen not too long ago.
It may not make sense to you, but the market is heading higher for now, and a break above 4200 is the only indicator you need right now.
If you look at the seasonality of the S&P 500 (SPY), the next 8-week period has returned positive results in 21 of the last 30 years, with a historical average of rising 2.37%.
So, I started looking for stocks that historically go up during the same period of time. NetEase (NTES) is one of those stocks, and has already been on a nice move upward for months.
NTES has gone up in 17 of the last 22 years during the next 8-week period, with a historical move of 12.76%.
Since the expected move takes place over the next 8 weeks, I want to look for an option with at least an additional 30 days to give myself some time. That means looking out to the 15 SEP options chain.
With implied volatility over 40%, I would like to find a credit spread with a shorter duration, but I didn’t find one that meets my criteria.
So, now I’m looking at a debit spread. I would look to buy the 15 SEP 90 call for about $10.30. Since the average move is 12%, that means I’m looking for NTES to move up to about $103, so I can look to sell the $105 call to offset the cost of buying the $90 call.
Buy to open NTES 15 SEP 90 call
Sell to open NTES 15 SEP 105 call
Net debit of around 6.00
Look at the 20-day and 50-day moving average as two potential areas as a stop loss. Or if you are trading multiple contracts you can use both of those moving averages as a guide. Since buying calls has a higher percentage of losing trades, I will also take part of the position off after profits of say 10 – 20%.
You want to let the winners run, but debit spreads have negative theta, meaning the debit spread will erode in value with each passing day if the stock doesn’t move higher.
You may want to see if NTES will pull back to around $87.50 (you can set an alert with your broker if NTES crosses below $88). We may pull back to near the 50-day and bounce higher from there.
Also make sure you check for earnings and adjust your trading accordingly.
If you have any questions, comments, or anything we can help with, reach us at any time.
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Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab
Any trade or trade idea discussed is for educational purposes only. They will not be tracked as an official trade recommendation.
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