Sunday Setups - 2/16

Happy Sunday,

To make your week 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, more of the same this week - except, we didn’t sell off on Friday. Monday morning started with a gap down that was quickly recovered. There was a bunch of chop with major economic data (inflation) & fed speak.

We are still trading within a range, and have been for the past two months. We saw a slight break out of the small downtrend we saw the past few weeks, but will it be enough to push prices higher out of this range (see gray downtrend line in chart)?

Or, is this a head-fake that will be followed by more downside (or chop)?

Well, if we take a look at the weekly chart, there is a squeeze forming (now 3 red dots on lower indicator:

So, it is entirely possible that we see more wide chop for the next several weeks, before the squeeze indicator resolves.

Ultimately, the prevailing trend is bullish (positively stacked EMAs on the weekly chart with rising prices). So, I would lean bullish in terms of direction for this squeeze - meaning probability still favors bulls over the next several months.

Now, I will not have strong conviction on continued upside until we break the old high with good volume.

However, the stock trader’s almanac shows an interesting trend for this coming shortened week:

Over the past 7 years, the S&P has been down 6 of the last 7 Tuesdays following President’s Day.

Now, this is not the holy grail - history may not repeat itself, but it can have a tendency to rhyme!

I just mention this to remind us to be open to a bit of downward price action early this week.

Additionally, there are two data points that may support this idea.

One - 4 of the mag 7 names (AAPL, NVDA, NFLX, META) are extended above their moving averages. So, it is possible they revert at least to their daily 8 EMA.

Two - given the put/call ratio remains in bearish territory, I wouldn’t be surprised if we got a dip down to $6000 in the /ES to shake out some longs before moving higher.

The 10 day moving avg (purple line in chart) of the put/call ratio remains low, so the potential for downside still looms.

Ultimately, I think this is setting up for a larger move over the next several months - so, there will be some great opportunity in tandem with this.

However, in the near-term, it is possible that we see a bit more volatility or chop.

Now, it is possible we break the all time highs and just start running, but given the current state of the market, it is not the environment to abandon all risk controls and just go fully long.

You will have more edge entering near the 21 EMA on the daily chart.

I think we need to be open to more sideways action before a larger move. Though, if we do get a large move to the upside, it will be important to take profits and be open to a correction shortly after to the 21 EMA - particularly if the 10 day moving average of the put/call ratio drops below 0.60, which is the relative low.

Finally, keep an eye on Bitcoin, which has been a fairly good indication of risk sentiment in the market. It has been consolidating, and the EMAs are stacked negatively on the daily chart. So, this opens the door to the daily squeeze firing short on this product.

If this breaks lower, that could trigger a downside move in equities.

Net - not much has changed from last week. The market is mixed, and we are still waiting for more information to determine a clear near-term trend, but at the end of the day, there are still plenty of opportunities to enter longs in strong names.

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

This week’s Trade Ideas

1.) MS  Long

Reasoning:

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