Sunday Setups - 2/2

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.

What a week!

We kicked it off with NVDA losing nearly $600B in market cap Monday - this was the largest single-day loss in market cap….pretty big deal!

Even before the equity markets opened Monday, the futures had given up nearly all of the gains from the prior week. Shortly before the open, they found support and ultimately rallied into Friday.

Friday afternoon, Mr. President announced the tariffs would be going into effect this weekend, and the indices sold off all afternoon.

Quite a bit of action for just one week! But, this kind of volatility is what breeds opportunity - especially in the options market.

So, what should we be focused on now? Did Deepseek’s new AI model kill the bull market? Do we short NVDA because the demand for compute isn’t going to be what we thought?

In short, no. There were some interesting developments this week, but headlines don’t tell the full story.

When it comes to trading, we need to focus on price & technicals and stick to our plan.

Are the EMAs stacked positively on the daily and weekly chart?

Yes. The 8 EMA is greater than the 21 EMA, which is greater than the 34 EMA.

So, we are still in a bullish trend. So, probability still favors the long side of the market.

However, we need to constantly be asking the question - Is that trend changing?

It could be. Or, we could just be seeing some distribution (think wide to downward chop). Given the price action the past two months, we need to remain cautious.

The whole reason I like to cover the markets before searching for trades is to determine which way the tide is going and how strong the tide is.

• If we were in a clearly bullish trend with a continual pattern of higher highs and higher lows, I would be more aggressive with long entries and risk anywhere from 3-5% of my account on a trade.

• If there is distribution, like the price action we have seen the past 2 months, I may only risk 1-2% of my account on trades, and I will be more conservative with my entires and exits.

Let’s take a look at a few things to better understand how we should manage our risk in this current environment.

1 - The Put/Call ratio:

The 10 day moving average of the put/call ratio closed teh week at 0.64. This is a bearish reading - the market is more susceptible to a downturn at these levels. So, there remains risk to the downside until this starts to rise closer to 0.8 (or we get a daily close of the put/call ratio near 1.0 or higher).

2 - The Overall Chart Pattern.

The past two months we have seen wide chop, trading in a range between 5800-6100. Compare this to the price action we saw in Jan-Mar of 2024 (green box), where is was a continual pattern of higher highs and lows. When the prevailing indices don’t support a clear bullish trend, we need to be diligent with our risk.

For longs, I will continue to focus on names that have traded above their EMAs, have a daily squeeze, and tend to hold up well on these larger down days.

3 - There is a weekly squeeze forming on the /ES chart

It just printed this past week. When a product is “in a squeeze”, it will generally trade sideways a bit before releasing momentum (often in the direction of the prevailing trend). So, this means that we could see more rangebound trading before returning to the bullish trend. However, this range could be several hundred points wide.

Finally, the /NQ is printing both a Daily and a 2Day squeeze.

The prevailing trend is bullish (positively stacked EMAs and prior pattern of higher highs and lows). So, probability technically favors this firing to the long side.

Ultimately, I do think we see higher prices this year. It is just a matter of when and what path it takes to get there. However, given the extreme selling we saw Monday, I am keeping myself open to the idea that this fires short in the near-term.

Monday may have been a bit of a “tell” in terms of which direction we are heading, especially given the bearish nature of the put/call ratio.

So, to summarize, I am not just blindly buying. I am cautious until the larger trend becomes more clear.

We are not in a bear market, but I think it makes sense that we see some red days this week as the market digests the tariff news that was confirmed over the weekend.

If the indices continue to close above their 21 EMAs on a daily basis, that will support higher prices. However, if we get a daily close below the 21 EMA, then I would look for last week’s low to be tested (& potentially test the low we saw on 1/13).

Despite the volatility this week, we had some great wins in RDDT, RBRK, and CRWD. There are a few more setting up this week.

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

This week’s Trade Ideas

1.) TSLA  Long

Reasoning:

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