Sunday Setups - 10/6

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 /ES was basically flat this week, yet it had some head fakes each direction.

Lots of headlines this week related to the air strikes from Israel and the US dockworkers strike. It can be pretty easy to overreact and make poor trading decisions based on these emotions.

At the end of the day, headlines don’t really matter all that much when it comes to trading. We need to follow price and volume.

We started the week with a bit of a selloff, which was quickly regained at the close Monday. Tuesday morning brought more weakness, and we basically chopped around $5750 until Non-Farm Payrolls Friday morning. Indices spiked, sold off, and spiked again.

Quite the drama to close up a whopping 10 pts in the /ES on the week!

It did give us some great entries, which I’ll cover later.

The market structure is still bullish - the 8 EMA is above the 21 EMA, which is above the 34 EMA.

There has been a lot of consolidation around $5800 in the futures product, trading around this level for the past several weeks. I think the sell-off this week nearly to the 21 EMA might be enough to push this higher. My first target is $5850 (127.2% extension from this week’s swing high to low), and beyond that $5900 has a confluence of several extensions.

Let’s take a look at the cash index - SPX.

There are a bunch of extensions right at $5800 (also a big round psychological number), which would make this an obvious overhead target. This is 50 pts higher, which would align with that first target I mentioned in the /ES at $5850.

Now, I think the probability of the SPX hitting $5800 is relatively high.

Why?

If we look back over the last month, the index has barely even tested the 8 EMA. Price consolidated, and the 21 EMA has basically risen to catch up with price. This is a strong bullish trend.

The pullback we got this week might be enough to bring more buyers into the market and push prices higher.

So, do we just blindly go long?

Let’s look to see if there are any red flags pointing to a potential pause in the upward trend.

First, the VIX had an interesting trend this week. While the indices finished the week green, the VIX closed the week +2.25 or +13%.

It has had a clear trend of higher lows this week.

What does this mean? Well, for one, implied volatility on SPX options has increased. It does not necessarily mean that the market is headed for a selloff.

This could be impacted partially from the geopolitical headlines this week, causing some uncertainty. It may be a sign that the market is reaching an “exhaustion point”, meaning that the current uptrend is getting extended and may be due for a pullback.

Though, it is an indication that there might be more demand for downside insurance. So, while I don’t think it means we are heading for an immediate selloff, it tells me that we need to be conservative with entries and exits. There could be a selloff in the near future IF this trend continues. So, I will continue to watch it this week.

Next, let’s take a look at the Put/Call Ratio.

The 10 day simple moving average (purple line in chart) continues to drift lower, now at 0.67. When it reaches these levels, the chance for a sell-off increases.

Now, there are examples where this has gone lower, and the /ES has continued higher. So, take this with a grain of salt - this is not a “sell everything” flag. BUT, it does mean to warrant caution at these levels. The chance of a pullback is increasing.

Last time it was here (8/26), we chopped around for a week, and then sold off. Prior to that, in July, we rose for two weeks, and then sold off. In May, we sold off a few days later.

So, not the time to put your whole portfolio long - particularly in the indices. This aligns with last week’s trend in the VIX.

NET - the indices continue to follow their bullish trend, but given the red flags in the VIX and put/call ratio, we need to be prepared for a pullback over the next month.

I think it makes sense that the SPX goes higher, hits the upside target of $5800, and then we see some selling. That is my current bias.

What changes it?

If the SPX closes below last week’s low ($5675) on a daily basis, I will lean short and trim long positions that could be impacted.

So, given the mixed signals, how does that impact my trading?

Again, not everything is going to follow the indices exactly. So, we need to pick names that have a strong setup, strong trend, and clear indicators.

1. Most importantly - limit your position size when taking trades. If everything were pointing bullish, then we could increase size. But, this is critical for limiting risk. If your normal lot size is 10, consider 5.

2. Don’t chase momentum names and buy anything extended.

3. I should stay away from shorter time frame setups, like 30 minute, 1 hr charts. I should zoom out, and build out entries around the Exponential Moving Averages on the Daily or Weekly charts. This puts risk/reward in my favor.

4. Net - be patient (as hard as it is)!

Again, we have that pesky seasonality stat of October being down historically in election years. So, maybe we start the month strong and finish weak? Data from the Stock Traders Almanac below.

At the end of the day, the SPX is still trying to break out from the chop it has seen the past few weeks. A daily close above $5770 should confirm short term upside in the SPX.

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

This week’s Trade Ideas

1.) CTAS  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 over the next few weeks.

• This has been trending nicely - no huge moves either way, just clear reversion to the mean and continuation of it’s bullish trend.

My Levels:

Entry Zone: $201 - $205

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

• Entries priced at $205 - current level / 8 EMA. Ideal entry is 21 EMA on the daily.

Targets: $214 - $222

• T1: $214

  • 127.2% fibonacci extension from most recent swing high to low. Also a 161.8% fibonacci extension from prior swing high to low.

• T2: $222

  • 261.8% fibonacci extension from prior swing high to low. Could take some off at $217 which is the 161.8% extension from the most recent swing, but the past few daily squeezes have led to the 261.8%, so I will aim for that.

CTAS Options Strategies

**exits are theoretically priced for 2 weeks out, but the price of the underlying is the primary trigger for taking the trade off. In other words, if price gets close to $214, I look to sell the calls as close to the MID price as possible.

Long Calls (65 Delta, $200 Strike, 40 Days to Expiration)

• Entry: BUY +1 CTAS 100 15 NOV 24 200 CALL @10.50 LMT

• Exit T1: SELL -1 CTAS 100 15 NOV 24 200 CALL @15.75 LMT

• Exit T2: SELL -1 CTAS 100 15 NOV 24 200 CALL @23.00 LMT

2.) CAVA  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 $5 off of life-time highs, so potential for that to be breached with little resistance.

My Levels:

Entry Zone: $118 - $125

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

• Entries priced at $124 (round number between the 8 & 21 EMAs).

Targets: $140

• T1: $140

  • Cluster of fibonacci extensions from prior swings.

CAVA 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 (65 Delta, $120 Strike, 40 Days to Expiration)

• Entry: BUY +1 CAVA 100 15 NOV 24 120 CALL @12.50 LMT

• Exit T1: SELL -1 CAVA 100 15 NOV 24 120 CALL @22.40 LMT

3.) ED  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 a few points off the all time high, so less resistance overhead.

• Additionally, this has been consolidating below $100 for over a year. It seems to have broken out of the range, and this daily squeeze could push that breakout further.

My Levels:

Entry Zone: $102.5 - $104

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

• Entries priced at current levels - this is in the buy zone.

Targets: $108 - $110

• T1: $108

• T2: $110

  • Cluster of fibonacci extensions from prior swings. It is really stacked as 107, 108, 110, but minimizing targets for simplicity

ED 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 - meaning, if the stock price reaches $85, you sell the options as close to the active MID price as possible.

Long Calls (69 Delta, $100 Strike Price, 40 Days to Expiration)

• Entry: BUY +1 ED 100 15 NOV 24 100 CALL @4.90 LMT

• Exit T1: SELL -1 ED 100 15 NOV 24 100 CALL @8.50 LMT

• Exit T2: SELL -1 ED 100 15 NOV 24 100 CALL @10.40 LMT

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

Open Trades Review

Week of 8/18 Trade Ideas

• LOW (8/21 entry)

  • We got T2: $270 this week & booked another 1/4th of the position. So, I am now holding half the position for T3: $290, T4: $320. Acts great - monthly squeeze is really pushing this higher.

Week of 9/1 Trade Ideas

• ROP (CLOSED)

  • Cut it loose with a close below the 34 EMA. Flat ROP

• META (9/6 entry)

  • Still holding this - this acts great. Great close this week - will look to close out on any strength this week near $600.

Week of 9/8 Trade Ideas

• TTD (9/9 entry)

  • This still looks great - holding half for T2: $118.

Week of 9/15 Trade Ideas

• NFLX (9/16 entry)

  • Holding 3/4ths for T2: $742, T3: $765, T4: $795. Earnings are on 10/17, a couple weeks out. So, those targets above 742 might be a stretch, as I don’t like to hold through earnings. I’ll likely take this all off this week on any strength. Most recent swing high to low has a fibonacci extension at $732, which would be a fine exit.

• FTNT (9/19 entry)

  • Still looks great, just taking it’s time. Holding and waiting for the squeeze to play out. Targeting T1: $79, T2: $86.

Week of 9/22 Trade Ideas

• INTU (CLOSED)

  • This could not regain the EMAs - it broke the rules, so I had to cut it loose. Flat INTU

• UBER (9/26 entry)

  • Could have been a bit more patient on the entry with this one, but the setup still looks good. Holding for targets up at 88 to 90 ish.

• ADI (no entry yet)

  • This fell off my radar for a bit. Looking to enter this week on a fresh new squeeze - being patient for an entry at the 21 EMA.

• TSLA (no entry yet)

  • Next week is their cyber taxi release…these tend to be sell the news events. Shortly after is earnings. So, I am avoiding this one until those have come and gone.

Week of 9/29 Trade Ideas

• AON (9/30 entry)

  • Entered on weakness into the 21 EMA, and it still looks good - waiting for this to play out. Target up at $367-370ish and maybe $400 if this fires before earnings.

• CPAY (10/2 entry)

  • Got in near the 8 EMA, and this is moving nicely - will look to book profits on any strength this week up near $340ish.

• MRVL (9/30 entry)

  • Got in near the 21 EMA, and it looks good so far - holding and waiting for the squeeze to play out. Targeting $80

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