Sunday Setups - 9/8

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 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.

Turns out those flags we called out were a pretty good signal that there was weakness ahead.

The /ES (S&P futures) ticked up 0.75 higher than last week’s high, and was quickly met with selling. Tuesday afternoon, it broke last week’s low, trading down near $5500. You can see that that level ($5561.25 - the prior week’s low), then became resistance. The second time it failed (Thursday’s open) was good confirmation that there would likely be lower prices - see chart below:

We are now at an interesting level. On the weekly chart (left chart below), we are near the 21 period exponential moving average, and we are at the 50% retracement level from the most recent swing low to swing high.

The 21 EMA can be considered the mean, which prices tend to revert to, and in a healthy uptrend, prices will typically retrace down to the the 50% or 61.8% (sometimes the 76.6%) and continue their march higher.

However, we failed to make a new all time high, and the nearly 2% down day we saw Friday points to the idea that the bull run is coming to an end.

Not to say that prices don’t continue to new highs into the end of the year, but I think that it is more likely we see some “wide chop” over the next month or so.

So, that raises a few questions:

1. What does that mean for this coming week?

Well - high volume selling into the end of the week, going out on the lows, does not usually bode well for high prices Monday morning. It’s possible, but we should be careful for some initial weakness. There can be follow through from other markets that weren’t open Friday afternoon & those that were long and held could hit margin calls, which can lead to more liquidation.

That doesn’t mean we don’t see a “face-ripping” short-covering rally at any point, but I just say that to be weary of taking any large long positions first thing Monday.

Better to let the dust settle and see which names are holding up well compared to the market (more on this later).

2. What does this mean for prices through the end of the year?

If we zoom out and look at the Monthly chart of /ES, there are a few levels that stand out:

There is a lot on this chart, but looking at the Fibanacci Retracements & Extensions, there is some confluence around $5200 and $4900.

$4900 might seem like a far way to go, but that will be in play if the low we saw in August ($5120) is breached - particularly on a closing basis (either daily or weekly).

More near-term, I’ll be watching the 8 EMA on the monthly chart for any support ($5322). If that does not hold, I’ll be looking for $5200.

There should be decent support at $5200, given the volume traded there this year, but we will have to wait and see.

Net - higher is NOT the path of least resistance anymore, but this is not the time to get short. I will wait for a rally to the falling EMAs to place a short trade.

If we get higher prices, I’ll look to develop short positions in the SPX - particularly around the $5500 level. The rallies in down markets can be fast and furious.

The other thing to note is that the yield curve has “normalized”. Is this an indication that there is a recession coming, or that we are in a recession?

Typically, an inversion of the yield curve (2yr rates higher than 10yr rates) had been thought of as a signal for recessions. It was read as traders pricing in lower growth out into the future.

Though, the yield curve has been inverted since July of 2022, and it often normalizes as the economy goes into recession because the Fed works to lower rates as a response to a slowing economy.

This does not mean to short everything, but it is an important point in understanding how economic data could impact the market in the coming months.

The Fed has already said they are going to cut rates, likely by 25 basis points. If they cut by more than that, it could be a signal that they are really concerned about economic growth, which could in turn lead to near-term lower prices in equities.

Inflation numbers will not matter as much anymore, as there is more clarity around the Fed decision. Though, economic growth indicators, like jobs/employment numbers will likely become more important.

Last thing to point out is that it is an election year, and we are coming up on November. There are a lot of headlines about the stats showing election years being good years for equities. Though, the counter argument to that is the /ES opened the year at $4818, so even if we see lower prices, the year can end positive.

Now, I don’t say this to make a case for a full-on bear market. I don’t think we’re even close to that. Though, I do think the trend is changing, at least for the next few months. You can see that the 8 EMA (blue line in chart below) has crossed below the 21 EMA (red line in chart below). So, unless we have a quick recovery above the 21 EMA, probability says we see lower prices over the next few weeks.

We need to be aware of that, as it impacts what we trade, how we trade, and the duration used in options.

We will approach this market the same way we approach every trade - find names and levels where we can get edge, and use options to put the risk/reward profile in our favor.

There will still be good long trades in this market, but there will also be more short opportunities than there have been. And, we will need to be conservative with entries and exits for those longs.

Now, in terms of the economic calendar, we have some inflation numbers Wednesday and Thursday and Unemployment Claims Thursday. There could be some short term volatility in the futures if the claims are higher than expected.

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

This week’s Trade Ideas

1.) TTD  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.

• $14 off the all time high, so less resistance overhead.

My Levels:

Entry Zone: $99 - $102

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

• Entries priced at current levels (in buy zone at the 21 EMA).

Targets: $110 - $118

• T1: $110

• T2: $118

  • Fibonacci clusters from prior swings

TTD 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 (64 Delta, $100 Strike Price, 69 Days to Expiration)

• Entry: BUY +1 TTD 100 15 NOV 24 100 CALL @11.25 LMT

• Exit T1: SELL -1 TTD 100 15 NOV 24 100 CALL @14.25 LMT

• Exit T2: SELL -1 TTD 100 15 NOV 24 100 CALL @20.50 LMT

2.) BOOT  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.

• $8 off the all time high, so less resistance overhead.

My Levels:

Entry Zone: $133 - $136

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

• Entries priced at current levels - between 8 and 21 EMAs.

Targets: $155 - $167

• T1: $155

• T2: $167

  • Fibonnaci clusters from prior swings

BOOT 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 (47 Delta, $140 Strike Price, 69 Days to Expiration)

• Entry: BUY +1 BOOT 100 15 NOV 24 140 CALL @8.90 LMT

• Exit T1: SELL -1 BOOT 100 15 NOV 24 140 CALL @20.00 LMT

• Exit T2: SELL -1 BOOT 100 15 NOV 24 140 CALL @30.00 LMT

Call Debit Spread (Buying $140 Calls, Selling $160 Calls, 69 Days to Expiration)

• Entry: BUY +1 VERTICAL BOOT 100 15 NOV 24 140/160 CALL @5.50 LMT

• Exit T1: SELL -1 VERTICAL BOOT 100 15 NOV 24 140/160 CALL @11.00 LMT

• Exit T2: SELL -1 VERTICAL BOOT 100 15 NOV 24 140/160 CALL @14.00 LMT

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

Open Trades Review

Week of 7/28 Trade Ideas

• ABT (7/30 entry)

  • Took off another 1/3rd at $115 (T2 was $114). Still looking higher for $117. This continues to look good - tested the 8 EMA and held. Will we get $117 this week??

Week of 8/4 Trade Ideas

• AVB (8/8 entry)

  • Holding half position on this. Hit $230 this week and had a gap down Friday. Though, it held and had a solid close. Still looking for T2: $236, but might settle for $230 to be conservative, if it can’t break through.

Week of 8/11 Trade Ideas

• LEN (8/14 entry)

  • Setup still looks great - holding the EMAs and a pattern of higher lows/highs. Looking for $187 to take profits.

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. Looking to enter this week off of the hourly squeeze.

• PAYX (8/20 entry)

  • Holding, looking for T1: $132, T2: $136, T3: $144. Still holding full position - it looks good.

Week of 8/25 Trade Ideas

• CRS (9/3 entry)

  • Big down day got us an entry at the 34 EMA. This is good because if it goes down, it will be a small loss. Don’t love the way it closed the week - one more close below the 34 EMA, and I will cut it loose. Holding for now…

• MTZ (no entry)

  • This is very similar to the CRS trade, but I did not enter with the strong selling. I might have, had we not also just entered a trade with a big down day. This looks done for, but will keep watching. If price recovers the 21 EMA on the daily on a closing basis, I will look to enter. If it stays below the EMAs, I’ll take it off the watchlist.

Week of 9/1 Trade Ideas

• SPOT (no entry)

  • No entry yet - similar story to MTZ. Squeeze still in tact - will look to enter if price regains and closes above the 21 EMA.

• ROP (9/4 entry)

  • Got an entry here - looks good. Holding and waiting for this to play out.

• META (9/6 entry)

  • Picked this up on the drop Friday. Weekly squeeze looks great and there is now a daily squeeze. Looking for this to recover the 21 EMA and continue higher - target around $600.

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