Sunday Setups - 10/27

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 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.

The sea was angry that day, my friends! -George Costanza

Price action this week was choppy, with very little trending action. This is distribution.

Oh, and TSLA was only up +18% (on an $800B company!)…what a move! That monthly squeeze that we have been talking about is rearing it’s head. I’ll be looking for more opportunities for long entries here, as I think this will be a big trade into the end of the year.

Like we talked about last week, the potential for a reversion to the mean (the 21 Daily EMA) presented itself this week.

The /ES started Monday and Tuesday with a pattern of selling off and then recovering. On Wednesday, when price broke Tuesday’s low for the second time, the selling kicked in, taking the /ES down below the 21 EMA. I think everyone was looking at SPX 5800 as support, so price dipped well below that to clear out stops. After stopping out a good amount of longs, the VIX finally reversed and the /ES had a sharp rally into the end of the day. Thursday we had another test of the 21 EMA on the daily, and it held.

Friday started with incredible strength - all the Mag7 were participating, but that $5800 level on the SPX was too strong. SPX nearly pinned there to end the week.

So, not the greatest candle to close out the week, but price held the 21 EMA which is bullish. However, there are now a few cracks on the bull’s foundation, so to speak.

So, where do we go from here?

First, the bullish structure is still in tact, as the faster moving averages are higher than the slower moving averages (8 EMA > 21 EMA > 34 EMA). So, I’ll continue to lean bullish, as long as we continue to make higher lows.

However, I have a pretty clear trigger for the downside after this week, should prices move lower. Specifically, if the low on Thursday is broken (below the 21 EMA), I’ll trim my longs and start to look short on the SPX. Downside targets would be 1: the 34 EMA on the Daily chart, which also happens to be the 8 EMA on the weekly chart(SPX $5740 - blue line in chart below), 2: the 21 EMA on the Daily chart (SPX $5575). Though, I’m not looking for that large of a pullback until we get a trigger.

However, for now, I am bullish, and I have a target of $5920 in the SPX. There is a confluence of two fibonacci extensions at this level. Beyond that, I am looking for $6000, but I think there will be some back and forth before that happens.

If we break Friday’s high, I think it is likely we see new all time highs.

Looking ahead, we have the election in about a week - I think it makes sense that we rally into that, and maybe see some distribution or selling shortly thereafter, for a reset in the indices.

Though, we will let price guide us. While this is a tricky spot in the SPX, at least there are clear triggers for upside & downside.

Now, let’s take a look at some of those “cracks in the foundation” that I mentioned earlier, which lead me to believe that we might see further downside in the near future.

For one, the Put/Call Ratio has been at meaningful lows for the past few weeks. When this happens, the probability for a reversion to the mean (the 21 EMA) increases.

The SPX reverted to it’s Daily mean this week, but the Put/Call ratio did not move much. Ideally, the 10 Day Simple Moving Average (purple line in the chart) would have moved back up more significantly, with that selling that we saw. I would like to see the average closer to 0.8 or higher to feel confident in a longer-term market bottoms. If the average continues lower, I will take more risk off the table and be more open to short trades.

Secondly, the VIX is putting together a bullish setup, which is bearish for equities.

The shorter EMAs are higher than the longer EMAs (8 > 21 > 34), which is bullish, and it (so far) has made a higher low (see green line in chart above). Demand for downside protection is increasing.

Finally, let’s take a look at the Mag7, and see if there are any clues there.

• TSLA - bullish structure on Daily & Weekly Charts (8 > 21 > 34 EMAs); Monthly Squeeze.

• GOOGL - bullish structure on Daily Chart (8 > 21 > 34 EMAs) / Weekly Chart is generally bullish, but not as clean, as the 8 EMA crossed below the 21 EMA; Daily Squeeze. Earnings this week (10/29)

• META - bullish structure on Daily & Weekly Charts (8 > 21 > 34 EMAs); Daily Squeeze. Earnings this week (10/30)

• MSFT - bullish structure on Daily & Weekly Charts (8 > 21 > 34 EMAs). Earnings this week (10/30)

• AAPL - bullish structure on Daily & Weekly Charts (8 > 21 > 34 EMAs); Weekly Squeeze forming. Earnings this week (10/31)

• AMZN - bullish structure on Daily & Weekly Charts (8 > 21 > 34 EMAs); Weekly Squeeze fired, Daily Squeeze forming. Earnings this week (10/31)

• NVDA - bullish structure on Daily & Weekly Charts (8 > 21 > 34 EMAs); Weekly Squeeze fired - heading to $150?

Net - these are all bullish. So, as long as these continue marching higher, it will be hard for the indices to have significant pullbacks.

However, this is clearly the week of the Mag7 earnings! With 5 of the 7 reporting Wednesday and Thursday, it should be a fun one! (Hopefully not a spooky one!)

If I had a gun to my head, I would say these are heading higher, based on the chart setups. However, anything can happen with earnings, and these events can either accelerate the setup (TSLA this week) or nullify it all together.

So, any big moves here are going to impact the overall indices (obviously). So, it might make sense to stay light this week, wait for these reports to come out, and then put on positions when the immediate direction is a bit more clear.

I have some SPX plays in mind based on breaking highs / lows mentioned earlier. So, I’ll outline those below, but I am still focused on the long side of this market.

Finally, there is a squeeze forming on the Nasdaq futures Daily chart (/NQ). The earnings reports this week could be the ignition (& gas pedal) for the bullish engine that is revving in this market…

Given the bullish structure of this index, coupled with the bullish structure of the Mag7 names, I’m bullish.

Yes, there is risk, but I think we climb the wall of worry a bit more before the bottom falls out.

Alright, here is what I’m trading this week.

This week’s Trade Ideas

1.) COST  Long

Reasoning:

• Bullish Trend (8 EMA > 21 EMA > 34 EMA) on the daily and weekly charts - trading with the trend

• Squeeze on the daily chart, which increase the probability for a bigger move in the near future.

• Just about $30 off of life-time highs, so potential for that to be breached with little resistance.

My Levels:

Entry Zone: $890

• 34 EMA (green line in daily chart) up to the 8 EMA (blue line in the daily chart)

• Entries priced at current levels - 34 EMA.

Targets: $960

• T1: $960

  • 161.8% extension from two most recent swings high to low.

COST Options Strategies

**reminder: exits are theoretically priced for two weeks out, but the price of the underlying is the primary trigger for taking the trade off.

Long Calls (50 Delta, $900 Strike, 54 Days to Expiration)

• Entry: BUY +1 COST 100 20 DEC 24 900 CALL @33.00 LMT

• Exit T1: BUY +1 COST 100 20 DEC 24 900 CALL @60.00 LMT

I’ll keep you posted on any trades I take!

Open Trades Review

Week of 8/18 Trade Ideas

• LOW (CLOSED)

  • Closed this all out - great trade! Cleaning up the book a bit. Might still have room to run.

Week of 9/22 Trade Ideas

• ADI (10/8 entry)

  • Waiting for squeeze to play out - still looks good. Just taking it’s time…

Week of 10/6 Trade Ideas

• CTAS (CLOSED)

  • Didn’t love the pullback below the 21, so took the rest of this off for basically breakeven. Good trade.

• CAVA (CLOSED)

  • Got $140 this week and took profits. Great stress-free trade!

• ED (10/7 entry)

  • Nearly got $108 and sold off. Hopefully someone took profits! I’m still holding - let’s see if we get a bounce off the 21 EMA.

Week of 10/13 Trade Ideas

• WMT (10/14 entry)

  • Got first target of $83 this week. Holding half for $86.

• TSLA (10/14 entry)

  • So far so good! Great move post-earnings. Holding this for $300 & have plenty of time.

Week of 10/20 Trade Ideas

• BOX (10/22 entry)

  • Good entry - waiting for this to shift positive. Holding for now.

That’s it, that’s all. Let me know what you thought of this week’s Sunday Setups!