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January 27th, 2022
What Recession? GDP Is On The Rise!
The Nasdaq 100 set a 6-week high and the Dow Jones Industrials hit a 1-week high. Thursday brought several reports that suggested the economy can shrug off a recession. That included the 2022 fourth-quarter Gross Domestic Product (GDP) report. The consensus was a 2.7% increase quarter-over-quarter, but we got a surprise 2.9% reading instead. That means the total value of the country’s production grew more than expected.
Earnings helped boost the market higher as well. Companies like Tesla (TSLA) surged 10%, which helped lift the other tech stocks. Chevron (CVX) rose nearly 5% after earnings and the announcement that it would raise the annual dividend and spend $75 million in stock buybacks.
Where does that put the broader market?
Here’s a chart of the Dow Jones Industrials (via ticker DIA). I’ve also included the Williams%R indicator. I’ve written about it before – it’s a momentum indicator that moves between 0 and -100. A reading above -20 is overbought and we’re sitting at -29 right now, which means we could have more upside room to go.
You can also see on the chart that an overbought reading on Williams%R doesn’t mean the trend is over. But it gives you a warning of a potential reversal. The two areas in the middle of the chart had an extended overbought reading as the market continued higher. That could happen again, but we’re getting close to a long-term trend line that we’ve had a hard time crossing in the last year. Will we get a breakout here? Anything is possible, especially with a Fed meeting next week.
Oh, and if you’re interested, the Williams%R is calculated as follows:
W%R = (Highest High – Close) / (Highest High – Lowest Low).
Alright – let’s talk about technical analysis.
Stock chartists love their chart patterns and their fun names. Cups and handles, head and shoulders, and the one we’re going to talk about – the flag/pennant.
Pennants look similar to a pennant flying on a flagpole. The security rises quickly on heavy volume (pole), consolidates with lower highs and higher lows (pennant), and then the underlying continues to move higher. Excuse my drawing, but it looks like this.
Let’s go back to the DIA chart from above, but zoom in a bit. It’s not a perfect example, but there’s a possibility that a continuation breakout can occur from here.
For a profit target, you’d typically take the distance from the top of the pole to the base and add that to the top of the breakout (if it happens). In our example, that’s about 346 – 290 = 56. Then we’d take 56 and add it to the top of the breakout line – let’s say around 340. The profit target would be 340 + 56 = 396. The issue I have with that is the high in January 2022 was around 370 and I don’t see us starting a bull market right now that can take out last year’s high, let alone go higher.
While I wait to see what happens with DIA, here’s what I’ll be trading later today.
I’m going back to my S&P 500 (SPX) calendar trade. At 2:00 pm EST, I will look to buy an at-the-money calendar spread.
This is an example only – I’ll be adjusting the strike price based on the current price at 2:00 pm EST today. Since the market is closed when I’m writing this, I’ll show you using yesterday’s close.
SPX is at 4060, so I would look to buy the 17 FEB 4060 put and sell the 3 FEB 4060 put. That trade is showing a debit of $18.40, or $1,840.
This trade will benefit from theta decay over the weekend and if there’s any increase in volatility.
I’d like to see profits of 10-25% of the max profits by Monday. I would use the break-even lines as a stop loss. It makes it roughly a 1:1 trade with a $340 target or a $340 stop loss. If the trade succeeds, a $340 gain on an $1840 investment would be an 18% return over the weekend.
I don’t mind hanging on to this trade into next week if needed, but I’m looking to close down most of my portfolio before the Fed meeting.
Have a great weekend! I’ll be back next week for yet another busy week of Fed announcements and economic reports.
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Editor, Filthy Rich Dirt Poor
Trader, 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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