Sunday Setups - 1/5

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.

Before we get started, a friendly reminder that if you upgrade to Full Access, you’ll unlock instant access to:

📈 All of our Premium Trade Ideas.

💾 Full access to all trade commentary, trade ideas, and strategies (past & present)

⏰ Real-time trade updates with our trade tracker.

📗 Learn how to find the best setups on your own.

❓Ask any questions about setups, the market, or options.

And much more.

👉 Take advantage of our special deal for new subscribers and get full access for $1.

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.

Last week saw initial weakness, with the SPX breaking the prior week’s low on Thursday. From there, prices rebounded with some strong buying Friday, recapturing most of the decline from earlier in the week.

The 8 EMA has crossed below the 21 EMA, which indicates a potential shift in trend. Additionally, prices closed below the 21 EMA on the daily chart.

So, do we get rid of our longs and go short?

Well, this is a tricky spot, as there are a few scenarios that could play out.

First, let’s cover the bull scenario.

The SPX trades higher, clearing the first hurdle of $5965 (which is a confluence of the 61.8% fibonacci level from the recent high to low swing and the 127.2% extension from the swing we saw to start the year). This also happens to align with the falling 21 EMA on the daily chart. Given all of this, $5965 is likely going to be a pause point.

So, this would be a decent area to go short the SPX if the bear scenario plays out. However, for bulls to reclaim the trend, we would need to see two closes above the 21 EMA on the daily chart, which happens to be $5965 right now. This would give me confidence in higher prices, with the next hurdle being the high we saw on 12/26 at $6050. If that is breached, I would expect new all time highs.

The weekly chart of the SPX remains bullish, with prices nearly testing the 21 EMA and closing near the 8 EMA, which is bullish.

However, if price finds resistance at $5965 or $6050, the probability for a new low increases.

For the bear scenario, it is entirely possible we just start to sell off and continue lower in the weekly 34 EMA, but given the strength Friday, I think we might see a bit of buying continue before that happens (if it does).

Again, $5965 will be an important level to watch on a daily closing basis. If we are unable to clear that, I’ll look to sell call credit spreads on SPX around that strike.

Aside from this, there will be two scenarios I’ll be watching for the short side of the market.

1) Two daily closes below the 21 EMA.

2) A daily close above the 21 EMA, followed by a daily close below the 21 EMA the next day.

Technically, the daily chart has a bearish structure, with the 8 EMA below the 21 EMA. However, this is a tricky spot because the weekly chart remains bullish. So, I’ll give favor to the larger trend for now, but will be watching for a trigger short, if there is one.

The reason I’ll continue to be open to shorting the market remains primarily in the put/call ratio. We have yet to see the 10 day simple moving average (purple line below) move significantly higher, and we have not yet gotten a daily “extreme” reading up near or above 1.0. If we get continued selling, those will be the triggers I’ll be watching for a bottom in the market.

So, which way do we go?

If I had to pick, I think it makes sense that we see a bit of continued strength potentially followed by more selling - maybe into $5700 or even the daily 34 EMA on the SPX ($5663 as of now).

However, given everything discussed, this is a time to be patient and let price be our guide. Given the mixed signals, this is not the time to go “all in” on trades - it is a time to find outperforming names and keep position size small. If there is a short trigger, there will be some good potential on that side of the market.

Also FYI - markets will be closed on Thursday with the passing of President Carter.

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

This week’s Trade Ideas

1.) HOOD  Long

Reasoning:

Subscribe to Full Access to read the rest.