Sunday Setups - 12/8

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.

Another week, another all time high. The /ES made a new all time high all 5 days this week, which gave us several opportunities to take profits on open trades.

It has yet to trade back into the Daily 8 EMA - the last time this happened was before Thanksgiving (8 sessions ago).

This is very bullish, but do we keep going up or should we start looking to the downside?

Let’s dig in.

First, let’s ground ourselves in the reminder that all time highs are bullish - not bearish. So, let’s look at a few levels and markets to determine if any sell signals are presenting themselves.

The /ES seems to have a bit of resistance around $6110, which aligns with the 127.2% extension from the downswing we saw post-election. This equates to $6100 in the SPX cash index.

You can see that the futures sold off a decent amount after hitting that fib level - Thursday at 11am and Friday at 9am. This alone does not mean we hit a top - I just point it out, as this will be an important level to watch this week. Does it continue to be resistance, or will we trade through it to higher upside targets?

Let’s take a look at the Nasdaq futures.

The /NQ was able to trade through it’s 127.2% fib level and looks poised for higher targets ~$22000.

While prices are extended above their moving averages, it does not necessarily mean that they will revert to the mean (defined here as the 21 EMA). Though, the chances of that happening increase the longer we trade up here. So, let’s take a look at the average true range of these futures products to get a better sense of how extended we are.

Both the /ES and /NQ are trading at 2 ATR from the mean. This can be an area where prices pause and revert to the mean, but there is also a scenario where prices continue higher into 3 ATR, where we would look to reduce long risk exposure and wait for better entries.

So, not quite “extreme” levels, but still decently extended.

Finally, let’s take a look at the Put/Call ratio, which I think is raising a bit of a red flag…

Take a look at the 10 day moving average of the put/call ratio (the purple line in the chart above) - it is currently at 0.61. The last time we saw this reading was 7/9. From there, the S&P traded higher for 5 sessions before selling off into the daily 21 EMA, pausing briefly, and then trading as low as the weekly 34 EMA before continuing the upward trend.

So, what’s the play?

Well, probability favors trading with the current trend, especially when it is this strong. So, I will continue to focus on the long side in individual names with strong setups.

However, given the put/call ratio is reaching extreme levels, I am going to limit the risk I put on to the long side, and I will start to look for hedges or downside plays in the SPX, as these levels present an interesting risk/reward ratio.

If we are going to see a Santa Claus rally, it might make sense that the S&P trades down to the daily 21 EMA before heading to new highs.

I’m not looking for the market to fall apart, but am targeting the 21 Daily EMA on the SPX (& /ES) in the near-term. I’ve got a few of these ideas outlined for this week.

The counter-argument to this lies in the Mag7 names, as these have been leading the market higher.

• TSLA: bullish structure on daily/weekly charts & positive momentum. This is now only 25 pts off the all time high. It was up nearly 20 on Friday. We could see this momentum continue to all time highs this week. (still holding our long position btw).

• AAPL: bullish structure on daily/weekly charts & new all time highs. 2 day squeeze fired long, so could see higher prices continue. Looking at $249 overhead.

• MSFT: broke out of it’s range this week and both the daily and the 2 day squeeze fired long, so could see higher prices continue. Looking at $450 next.

• GOOGL: bullish on daily and weekly. A weekly squeeze is starting to set up, so we could see some consolidation before higher prices.

• META: bullish structure on the daily & weekly. 2 day squeeze fired long, so prices could continue higher. Took profits on our long positions this week, but this still looks good.

• AMZN: this just blasted off to the new highs. This is extended, but still bullish.

• NVDA: bullish structure on the weekly and shifted bullish on the daily. There is a 2day squeeze setting up, so this could consolidate a bit more before heading to new highs.

Net - they are primarily bullish and you don’t want to fight that trend. Though, several are extended. So, we could see a bit of a pullback or consolidation before heading higher.

So, the million dollar question - where do we go from here?

I’m still bullish, but am more cautious at these levels, especially given the reading in the put/call ratio. I am looking for a few down days over the next several trading sessions, taking the S&P into it’s daily 21 EMA. From there, I’ll watch the put/call ratio and price action.

Given the strength in the Mag7, we might have a scenario where we see continuation higher followed by a reversion to the EMAs. At the end of the day, entering new longs on the indices just does not present a good risk/reward ratio at these levels.

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

This week’s Trade Ideas

1.) BLK  Long

Reasoning:

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

• There is a squeeze on the daily chart, which increase the probability for a bigger move over the next couple weeks.

• After a run up in prices, this has been consolidating over $1k, holding support at the 34 EMA - good overall pattern.

My Levels:

Entry Zone: $1015 - $1035

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

• Entries priced $1030 (round number slightly above the Daily 21 EMA)

Targets: $1100

• Target 1: $1100

  • 127.2% fibonacci extension from largest swing high to low in the name.

BLK Options Strategies

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