Sunday Setups - 9/1

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!

Happy Labor Day everyone - I hope you’re having a wonderful long weekend!

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.

Last week, I mentioned that we might get a bit of consolidation or selling down to the 21 EMA before heading higher.

So far, that assumption has played out.

NVDA earnings came and went, and who won? Market makers….selling premium! Implied volatility was high leading into this event - NVDA options were pricing in a move of nearly 10% up or down, and that implied volatility got wiped out the day after earnings. Just a quick reminder that buying OTM options into earnings is a losing strategy.

While initially, it looked like NVDA might fall apart, it held the 34 EMA. It didn’t explode higher, and it didn’t fall apart. Like they say, buy the rumor, sell the news.

Now the million dollar question - do we keep heading higher, similar to each pullback we have seen over the last year? Or, do we break last week’s low of $5,561 and head lower?

Well, let’s look at our indicators and the rest of the market to determine our bias and ensure that we are trading with probability in our favor.

As I mentioned last week, it is hard to make the case for bears in this market, as there are several factors in favor of the bulls.

First, let’s look at market structure & trend.

Take a look at these charts of the /ES (S&P Futures):

The exponential moving averages are stacked positively, and the 8 EMA has crossed above the 21 and 34 EMAs - buy signal.

The blue line is the 8 period exponential moving average. The red line is the 21 period exponential moving average, and the green line is the 34 period exponential moving average. These studies help to visualize the trend of the underlying asset.

When the shorter-term EMAs are below the longer-term EMAs, the trend is down, and the opposite is true as well - positively stacked EMAs (8 > 21 > 34), would indicate a bullish trend. (more details in last week’s newsletter)

We trade with the trend, as you can be imperfect with entries and exits & still trade profitably. You put probability in your favor & can structure trades with low risk and potentially high reward. Trading against the trend requires more exact timing and there are fewer opportunities with low risk high reward profiles.

Additionally, the longer time frame chart (weekly) of the /ES has not changed structure throughout all of this. The 8 EMA has remained higher than the 21 EMA, which has remained higher than the 34 EMA. So, these sell-offs have just been healthy reversions to the mean (21 EMA), in a bull market.

It’s when the EMAs cross negatively on the weekly chart that could mean a more prolonged bear market.

Net - market structure is bullish in the S&P Futures (positively stacked EMAs with higher highs and higher lows in price movement). Is that the case in the /NQ?

Looking at the /NQ, it has been the weaker of the two indices - only retracing 61.8% of the prior downswing (7/8 - 8/5), whereas the /ES is beyond the 78.6% retracement and is just about 65 pts off all time highs.

This is what I would call a yellow flag. Let’s dig a little deeper and look at the “Magnificent 7” stocks (AAPL, MSFT, NVDA, GOOGL, TSLA, AMZN, META). These make up ~42% of the Nasdaq and ~31% of the S&P.

AAPL: good bullish structure on Daily & Weekly

MSFT: bearish structure on Daily, and shifting from bullish to bearish on Weekly timeframe.

NVDA: good bullish structure on Daily & Weekly

AMZN: bearish potentialy shifting to bullish on Daily, and bullish on Weekly

META: good bullish structure on Daily & Weekly (also has a weekly squeeze, looking like it might be setting up for a larger move higher)

GOOGL: bearish structure on Daily, and potentially shifting from bullish to bearish on Weekly timeframe.

TSLA: bearish potentialy shifting to bullish on Daily, and bullish on Weekly

Net - 3 of the 7 have clear bullish structure, while the other 4 have somewhat mixed signals.  So, not a clear signal for the bulls - need to remain cautious and conservative in this market.

Second, let’s look at the put/call ratio. Extreme readings can give us an indication of a change in immediate-term trend.

The 10 day moving average of the Put/Call ratio (purple line in chart), as at 0.71, which is low. So, that could indicate a potential top in the indices.

However, we do not have a true extreme reading, relative to recent history. You can see that the 10 day simple moving average remained below 0.7 for some time.

I’m looking more for a daily reading below 0.5 or 0.45 that would indicate a more extreme bullish call buying than we have seen in recent months. That would be a reversal sign for me to lighten up positions and focus only on names with the strongest price action.

So, not a bearish signal quite yet, but another yellow flag, given the low reading of the 10 day SMA of the PCall.

Third, any other extreme readings across major markets that would indicate a shift in risk appetite or exposure?

The Aussie Yen is a bit of a red flag here, as it has had a fairly drastic reversal.

Why does this matter?

Well, the Australian dollar is often regarded as a "risk-on" currency due to Australia's significant reliance on commodity exports to China and its sensitivity to global economic growth. In contrast, the Yen is viewed as a "safe haven" currency that traders turn to during times of market volatility.

As a result, the AUD/JPY pair is frequently seen as a reliable gauge of risk sentiment in financial markets, rising during periods of optimism and falling when risk aversion is high.

So, looking at the chart of AUD/JPY, the daily time frame has bearish structure, which could be shifting back to bullish if we get a decent close above the 34 EMA. However, the weekly chart is shifting bearish, as the 8 EMA has crossed below the 21 and 34 EMAs. See below:

This is coming into a critical area (~100-101), where we will get a better indication of where this trend develops. It could come into resistance at these levels and continue lower. This would be bearish for equities.

So, whats next? $6,000 or fall apart?

Overall, I think we could continue higher in the near-term, but I think the strong momentum we’ve seen earlier in the year is slowing.  So, we could be nearing a top in the market or at the very least a bit more distribution over the next few months. Given the weakness in the /NQ and the big reversal in the AUD/JPY, I think caution is warranted.

Again, what’s more important to my strategy is identifying the overall trend - bullish to neutral, and gauging whether or not there is an immediate risk to the overall market. There are some significant cracks in the foundation so to speak, so will need to be patient with entries on the long side and take profits early.

Remember: strong convictions, weakly held. The market is always changing (thank you, captain obvious), so need to adapt outlook as more information comes available.

At the end of the day, I’ll continue to focus on equities with a strong bullish structure, squeezes, and recent prices near 52 week highs or all time highs.

This combo puts probability in our favor, and has proven successful many times over.  I’m not betting the kitchen sink on any one trade, and will remain light in terms of overall risk exposure, as there are a few yellow flags in the indices. If the market breaks last week's low, I will likely look for a short opportunity in the NDX (weaker of the two indices)

Now, in terms of the economic calendar, we have some jobs numbers Thursday and Friday. I’m not expecting much from this, other than maybe some short term volatility in the futures, but if there is a reversal, we’ll get positioned for it.

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

This week’s Trade Ideas

1.) SPOT  Long

Reasoning:

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

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

• Just about 13% off of life-time highs, so potential for that to be breached.

My Levels:

Entry Zone: $332 - $340

• 34 Day EMA up to the 8 Day EMA on the daily chart

• Entries priced at $340 (round number near the 8 EMA on daily chart)

Targets: $156 - $167

• T1: $375

• T2: $395

  • Fibonacci extensions from prior swings.

SPOT 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 (67 Delta, $330 Strike Price, 47 Days to Expiration)

• Entry: BUY +1 SPOT 100 18 OCT 24 330 CALL @22.25 LMT

• Exit T1: SELL -1 SPOT 100 18 OCT 24 330 CALL @47.50 LMT

• Exit T2: SELL -1 SPOT 100 18 OCT 24 330 CALL @66.50 LMT

Call Debit Spread (Buying $350 Calls, Selling $380 Calls, 47 Days to Expiration)

• Entry: BUY +1 VERTICAL SPOT 100 18 OCT 24 350/380 CALL @8.50 LMT

• Exit T1: SELL -1 VERTICAL SPOT 100 18 OCT 24 350/380 CALL @18.00 LMT

• Exit T2: SELL -1 VERTICAL SPOT 100 18 OCT 24 350/380 CALL @23.50 LMT

2.) ROP  Long

Reasoning:

• Bullish Trend (8 EMA > 21 EMA > 34 EMA) in both the weekly and the daily charts

• Daily squeeze, which increases the probability of a larger move.

• This name has basically been re-priced since May of this year - super strong price action, and looking for continuation up near $100.

My Levels:

Entry Zone: $545 - $552

• 34 EMA (green line in 4hr chart) up to the 8 EMA (blue line in the 4hr chart)

• Entries priced at $550 (round number between 8 and 21 EMAs).

• Willing to hold this down to $540, as that is the 34 EMA on the weekly chart. If there is a close below that, or 2 daily closes below the 34 EMA on the daily (~$545), I would cut it loose.

Targets: $565 - $600

• T1: $565

  • 61.8% retracement from most recent swing

• T2: $600

  • Fibonacci clusters from prior swings & round psychological number.

ROP 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 $98, you sell the options as close to the active MID price as possible.

Long Calls (62 Delta, $550 Strike Price, 47 Days to Expiration)

• Entry: BUY +1 ROP 100 18 OCT 24 550 CALL @13.50 LMT

• Exit T1: SELL -1 ROP 100 18 OCT 24 550 CALL @20.50 LMT

• Exit T2: SELL -1 ROP 100 18 OCT 24 550 CALL @45.00 LMT

3.) META  Long

Reasoning:

• This is a longer play, based on the weekly squeeze. I am going to be conservative with entries.

  • This could consolidate around $500 a bit more, potentially form a squeeze on the daily chart and then move.

• Bullish Trend (8 EMA > 21 EMA > 34 EMA) in both the weekly and the daily charts.

• Weekly squeeze, which increases the probability of a larger move.

My Levels:

Entry Zone: $468 - $511

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

• Entries priced at $500 (round number between the 8 & 21 EMAs), which would be a solid entry. If there is any volatility in the markets over the next few weeks, this would be my go-to long

Targets: $570 - $600

• T1: $570

  • 127.2% retracements from last two swings on weekly chart

  • 161.8% retracement from larger swing down from 2020-2022

• T2: $600

  • 161.8% clusters from two prior weekly swings

META Options Strategies

**exits are theoretically priced for two months out, but the price of the underlying is the primary trigger for taking the trade off - meaning, if the stock price reaches $570, you sell the options as close to the active MID price as possible.

Long Calls (65 Delta, $500 Strike Price, 110 Days to Expiration)

• Entry: BUY +1 META 100 20 DEC 24 500 CALL @43.00 LMT

• Exit T1: SELL -1 META 100 20 DEC 24 500 CALL @79.50 LMT

• Exit T2: SELL -1 META 100 20 DEC 24 500 CALL @104.00 LMT

Call Debit Spread (Buying $570 Calls, Selling $600 Calls, 75 Days to Expiration)

• Entry: BUY +1 VERTICAL META 100 15 NOV 24 570/600 CALL @5.00 LMT

• Exit T1: SELL -1 VERTICAL META 100 15 NOV 24 570/600 CALL @10.75 LMT

• Exit T2: SELL -1 VERTICAL META 100 15 NOV 24 570/600 CALL @19.00 LMT

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

Open Trades Review

Week of 7/28 Trade Ideas

• ABT (7/30 entry)

  • Looking good - after breaking the resistance up at $112, it dipped down there on Friday and found support. This is bullish. Still looking higher for $114 and $117.

Week of 8/4 Trade Ideas

• CVNA (CLOSED)

  • I decided to take this off on that dip down to the $150 area - got out of the rest at $152 - still profitable, but just not as many higher targets. Flat CVNA. Great trade. This could still go higher, but given the huge decline it had in 2022, there are going to be a lot of sellers as this rises. It will not increase with the same momentum as stocks near their all time highs, which is why I decided to cut it loose.

• AVB (8/8 entry)

  • Ok, took half off at $222 (T1: $221). This continues to look great. Holding the second half, looking for T2: $236, but might settle for $230 to be conservative.

Week of 8/11 Trade Ideas

• AEM (CLOSED)

  • Booked profits at $82 - close enough to $85. This is holding the 8 EMA, so it could still continue higher, but profits are profits! Great trade. Flat AEM

• LEN (8/14 entry)

  • Got a gap up Monday nearly at our target, and then sold off the rest of the week. Hindsight is 20/20 - likely should have taken profits, but I’ll look to book the gains on this soon. Setup still looks great - holding the EMAs and a pattern of higher lows/highs.

• MPWR (CLOSED)

  • I was holding the other 1/3rd of my position for $995, though,it couldn’t really break through $950 this week, so I decided to be conservative and book the rest of these gains. It might need more consolidation before moving higher. Flat MPWR - great trade!

Week of 8/18 Trade Ideas

• LOW (8/21 entry)

  • This still looks great - higher highs, higher lows, and holding the EMAs on the way up. This one is a longer term trade, with a monthly squeeze. Looking for T1: $260, T2: $270, T3: $290, T4: $320.

• BLDR (no entry yet)

  • No entry yet - this is too strong. It already reached T1: $182. So, if I get en entry, I’ll just be looking for $196. Hopefully, there is an opportunity at the 21 EMA this week to enter, as it sold off this week. There is an hourly squeeze on this one, which could help move it higher.

• PAYX (8/20 entry)

  • Holding, looking for T1: $132, T2: $136, T3: $144. Tagged $132 this week, but it was quick. Still holding full position - it looks good.

Week of 8/25 Trade Ideas (no entries yet)

• CRS (no entry)

  • No entry yet - being patient for somewhere near the 21 EMA.

• MTZ (no entry)

  • Hopefully some of you got this entry. I was busy and did not update my prices. Looking to enter near the 21 EMA. Being patient and conservative here.

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