Sunday Setups - 1/12

Happy Sunday,

To make your Monday more enjoyable, we’ve prepared some Fresh Trade Ideas for you. They go nicely with a freshly squeezed glass of lemonade!

What is the Sunday Setup?

It’s a short review of the market, trades from last week and a detailed overview of trade ideas for this week. Build your trading strategy for the week in the time it takes to finish a glass of lemonade.

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Alright, is that sugar kicking in? Let’s find some edge!

Market Review

Before we dive in to the individual trades that I am looking to take, I want to do a quick review of where the markets stand. Understanding the overall market trend will help guide us with how we approach these trades and position size.

Well, like we talked about last week, we got the head fake higher on Monday, with a close above the 21 EMA in the SPX. This was quickly followed by a close below the 21 EMA, which was our trigger to go short.

There was a bit of a bounce Wednesday, but the selling continued into Friday, as. the strong jobs numbers put some doubt on additional rate cuts.

So, where do we go from here?

Structurally, the daily chart is now bearish, as the shorter EMAs are lower than the longer EMAs. The 8 EMA < the 21 EMA < the 34 EMA. So, this chart would argue selling rallies into the 21 EMA.

We are also seeing a pattern of lower highs and lower lows, which is bearish.

The weekly chart, on the other hand, remains bullish, and we closed the week just above the 21 EMA.

So, is this another buying opportunity on our way to new highs?

It could be, but I think there is potential for lower prices before heading higher.

First, there is the election gap at $5783 (blue dashed line in chart below).

This aligns with the 78.6% retracement, measured by the low to high we saw at the end of 2024. That is a clear first target to the downside, and I think it makes sense that this gap gets filled prior to continuing the bullish trend.

That does not mean we get it right away (we could), but there might be some distribution (choppiness) on our way there.

Beyond that, I would look for the $5700 - $5680 zone as my next downside target. Reason being:
- There is the confluence of two 161.8% levels from the most recent swings.
- This is the 144 EMA on the daily, which tends to hold in a long term bullish trend
- This is just above the 34 EMA on the weekly, which has also been holding on the longer term bullish trend.
- This also happeens to be the 8 EMA on the monthly chart, which has

Could we go lower? Sure, but let’s take it one week at a time.

Secondly, the put/call ratio is still at relatively low levels.

The purple line in the chart is the 10 day moving average of the put/call ratio. This is still at relatively low levels, which makes it hard for the market to put in a bottom.

A good example of this was on 8/5 of last year - we had a multi-week decline, and the market put in a clear bottom on 8/5 when the put/call ratio spiked > 1.0 on a daily close. At the same time, the 10 day moving average reached 0.8. I am looking for a similar reading this time when considering a potential bottom in the SPX.

We saw some higher readings the end of last week, but nothing too extreme, which leads me to believer we might see a bit more downward chop before resuming the overall bullish trend.

Net, I think we see a bit more downside over the next 2-3 weeks before heading higher.

However, in these market conditions, there can be some very fast and furious snap back rallies. So, there should be plenty of opportunity on both sides of the market - short the indices and long strong names that are reverting to their 21 EMAs. This week, I have a few names that held up much better than the overall market the last few weeks.

Though, wait a minute….what about that old saying “so goes January, so goes the market”? If we are going to remain red through the rest of January, shouldn’t we expect a bearish trend through the rest of the year?

Well, it is possible, but let’s look at the accuracy of this over the past 15 years:

That is 8 out of 15 times over the past 15 years, or 53% accuracy. In other words, it is slightly better than a coin flip. So, like everything else in trading, we’ll have strong convictions loosely held.

So, longer-term, I’ll continue to stick with the bullish trend until price/signals present a stronger view of that trend changing.

Ok, here’s what I’m trading this week.

This week’s Trade Ideas

1.) PLNT  Long

Reasoning:

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