Bear Trap?

Heather Cullen

Heather Cullen

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In The Money

Heather Cullen Blog Bear trap

Is It A Bear Trap?

Maybe. Maybe not. As with all things in the stock market we will only know for sure after the fact. Just to refresh your memory of bear traps and bull traps:

Bull Trap Bear Trap ITM Heather Cullen In The Money

Bear traps happen in a bull market when a short term dip is mistaken for a trend reversal. (And no mean comments about my photoshopping skills!)

SPY Chart

Look at the SPY chart we see that it has been in an uptrend since March, and that is 5 months now. During those months we have had a period of consolidation (April – May) and a little bear trap in June. This one has been going on for 2 weeks now, and SPY has dropped 2.6%. Not a lot, but it still hurts, because if you have an option with a strike around $225 (approx. half SPY) you will be down at around 5%. Not nice.

But is it serious? Are we looking at a trend reversal rather than a blip? If we check the volume (the green graph at the bottom), we can’t see anything out of the ordinary, and there’s no evidence of a rush to the exit.  We are not at a death cross (our get-out signal), in fact we are quite a way from it. SPY would have to drop 10% from its peak to be there, and so far, we are only down one quarter of that.

I’ve drawn in the uptrend line, and you can see that it is being challenged. I have also drawn in a support / resistance line (magenta dashed) at around $445, so we can see that we are at quite a significant level. The next move – up or down – will give us a clue to the direction of the market.

Still, it’s not nice. Trading is not for the faint hearted.

SPYG Chart

SPYG has fallen in line with SPY, slightly less (2.4%) but other than that is displaying all the same characteristics. The uptrend line is being challenged. There seems to be support at $61 (the magenta line), we should be watching to see if that holds.

Heather Cullen Blog SPYG chart

QQQ Chart

Although QQQ is not part of the ITM strategy it is always good to keep an eye on it. QQQ started its uptrend much earlier that SPY and apart from a big bear trap in February, a smaller one in June and a long consolidation for most of April, it has been following it quite nicely – until the last 2 weeks of course.

Heather Cullen Blog QQQ Chart

It has dropped 5% since its peak, but this needs to be taken in the context of having increased 48% between January and July. It dropped through the initial possible support line (Magenta) and now we will watch to see if the next support line holds.

VIX (Volatility Index) Chart

The volatility index has risen a bit, but is still below the significant level of 20.

Heather Cullen Blog VIX Chart

Daytrading Experiment

I haven’t forgotten it. I just gave it a rest while I was on holiday for the summer. According to his Messenger Live feed he (Tom Hougaard) is starting again on the 22nd, so I will too. I must say I am not looking forward to it, too stressful and too boring – if that makes sense.

Heather Cullen Blog Bull and Bear

Which Option?

I have had a lot of questions about the price of options, and which options to choose, and have answered these at some length in the comments from last week. If you want to check them out, here’s the link.

ITMeter

Heather Cullen In The Money Blog ITMeter

Still bullish but feeling a bit of trepidation! The last 2 weeks have not been pleasant.

Weekly Blog

I have decided to try doing the blog every week, and making it more targeted to the market and what is happening. I have been getting requests for it, and it is good discipline for me as well – it makes me really look at the charts and to see if I can find reasons to explain what is happening. It will be available before the market opens on Monday morning.

Please let me know what you think in the comments below.

Email Notifications

I have been using Mailchimp to send out the notifications and thought that everything was working just fine – until I was looking for someone in the database just now and saw that he hadn’t been uploaded to the Mailchimp database.

In The Money Monkeys and markets

It is supposed to be an automatic process, but on checking I have just found out there are heaps of people on the website database that haven’t been uploaded to Mailchimp so they are not getting the notifications.

I will have to figure out what is going wrong (there goes my Monday!) and apologies to anyone who is not getting the notifications. I will fix it.

The Futures

When I started writing this all the futures were up; now, as I go to take a snapshot, they are all down. Aaaaarrrgh! What has happened? Checking news. News from China not great, dollar at a 2023 high against the yen, but nothing disastrous.

Still 7 hours to go to market open, and futures jump around a lot, especially after a weekend. Let’s hope for a rebound.

heather cullen blog futures

This week . .

Let’s hope it’s a better week than last week!

Heather

11 thoughts on “Bear Trap?”

  1. Hi Heather, I have been enjoying reading your books and was wondering if there are any more current directions? I’m finding it difficult to find SPY options with and Effective Price

    1. Hi Andrew, this is a question I am getting asked a lot lately, and I went into some detail in answers to the previous blog post: https://heathercullen.com/didnt-see-that-coming/
      Looking at today’s options chain, if we look at the January 24 options we have the $220 strike with a bid / ask of 223.95 / 225.16 which would (just) fit into the 1% effective price rule. However, this gives you only 50% leverage. If you want to go for a higher strike then you will have more leverage, but it will give you an effective price more than 1% above the current price.
      The $260 strike (60% of the current price) is 185.73 / 186.92 giving you an effective price (assuming that you buy at the mid point) of $446.33 which is 1.5% away from the current price. I would suggest that you decide what level of risk that you want and choose a strike somewhere between these 2.
      Please have a look at the answers in the comments I have linked to above as well, and get back to me if you have any further queries.
      Hope this helps
      h

  2. Hi Heather,
    I started ITMS on April 5th . I bought SPYG call as follows
    Trading date 05th April 2023
    SPY price 55.28$ Max buy price 55.56 $
    Strike Price 30$ Expiry 30th Sept 2023
    Premium 25.51 $
    Effective price 55.51 $
    Questions
    1. What expiry date should I choose for Roll up ? Is it from trading date (April 5th) or Expiry date (30th Sept 2023)
    2. Did I entered trade correctly or am I missing something

    1. Hi Kishore, yes the trade you did in April conforms to the ITM rules, and as SPYG is now trading at $60.85 (Monday 15th) you will be in profit. To roll up and out I would go for an expiry date of Jan 2023, and a strike between $30 – $35 depending on what leverage you use.
      Hope this helps.
      h

      1. Hi Heather,
        Thanks for responding. I didn’t find Jan 2024 expiry options so I went ahead with Dec 2023 expiry.
        Below are my trade
        Sell Sep 15 2023 30 Call at 30.85
        Buy Dec 15 2023 35 Call at 26.15
        Kindly let know if I am heading in right direction.

        Thanks
        Kishore Jain

        1. Hi – you are right, the option expiry dates for SPYG are Dec 23 then Mar 24 – there is no Jan 24. Very strange. Yes, you are in the right direction, but you will have to roll again in November. The March 2024 35 strike has a bid/ask of 25.90/26.60 so not much more than the December option so you may want to roll out to this. There isn’t much difference in performance, it just means that you would have to roll less frequently.
          Hope this helps – and hope the current downturn ends soon!
          h

  3. Excellent job on the books and the BLOG. Question for you – Do you recommend use of trailing stop orders or stop limit orders in addition to monitoring the death cross? If so, what is the recommended percentage to use for the trigger? I’ve had mixed results using these with individual stocks – perhaps because they were too aggressive which caused me to be stopped out (too early).

    1. Hey Jeff,
      no, I don’t recommend trailing stops – simply because of bad experiences with them. They always seem to get you out at the worst time. A small, temporary dip – and you are out – and then watch it climb back to where it was, and more.
      Stop orders? I never buy anything ‘at market’ but always put in my top price – which is usually the ask on bid/ask and I usually get filled at a better price (I think I go into ‘best available price’ it in the book? – if not please get back to me. Stop losses? same story.
      Individual stocks? No I don’t play with them (other than a few mining stocks in Australia that I buy to keep friends ‘in the know’ happy! But they invariably lose money. Every time! I should know better, but I try to be a ‘nice guy’)) You cannot predict with any certainty what an individual stock is going to do, but you can predict the whole market with a bit more certainty.
      So no, for the ITM strategy it is simply the 10/200 death cross – however, if you are playing with ATM / OTM options (and we all do, just make sure it is with ‘play money’) then you need something more sensitive – but I have not backtested it so I cannot recommend.
      Hooe this makes sense. Please get back to me if not.
      h

      1. Hi Heather, thank you for answering my question. Typically when I used trailing stops in the past I set them at 6%. And more often than not I got stopped out only to see the situation improve in a day or two. I was curious if you were going to recommend something like a 10-12% trailing stop … but I think I have your answer already loud and clear.

        Keep up the great work!

        BTW, we share similar professional backgrounds and unfortunately similar experiences – I laughed at the IT stories from your first book.

    1. Hey Jon, you asked this a while ago and I said I would work it out at the end of my holiday. Now I have. If you had bought the option recommended in the Bull Strategy book when it was published (2020), ($225 strike, page 171 of the hardback edition) and followed the strategy exactly, then the return until the end of July 23 was 144% compared with the market return of 42%.
      It is not earth-shattering, but you have to remember that half of that time was spent out of the market as it was a rather protraced bear.
      (I can post the backtesting if you wish, but I can put it in the comments.)

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