Consolidation means boredom.
What an uninteresting week. After all the wild rides we’ve been having recently I guess we should welcome it, but it still feels boring and boredom is NOT a trader’s best friend. It often leads us to do something dumb just because we feel we should be doing something.
But is it a bull?
No, not yet. Later, using hindsight, we may well decide that the bull had already started, but right now we can’t be sure.
So, yes, we may miss out on the first 10% and the last 10% of a bullrun, but as a wise person once said:
Wishing doesn’t make it happen
I am as keen as anyone for the next bull to start. I hate waiting on the sidelines, as I am sure you do to. But the most important thing is to be safe and protect your capital. If you lose that you’re out of the game.
But cheer up – it may not be long. Let’s check the charts.
To the markets
We appear to have entered a consolidation (sideways) phase, and, of course, the big question is: how long is it going to last? It may end tomorrow – actually its today now – or it may last for many months as it has in the past. As for everything in the market , we’ll only know for sure after the fact.
SPY Charts
SPY has been going sideways for 7 trading days – well on the way to establishing a Darvas box (although it is too early to draw it in). It is heartening that it is now out of correction territory and seems to have touched (intraday) the 200 SMA.
Interestingly, if you look at the chart with the 200-day EMA then it is trading above it, and that’s what a lot of traders watch. On the other hand, the 50/200-day EMA which is also a much-watched indicator had a death cross on 15th April and is showing no signs of turning upwards to a golden cross.
I mention these alternatives not because they are good alternatives (on the contrary, on backtesting they perform nowhere near as well as the 10/200 SMA) but because many traders watch them and you may see references to these in the financial media.
There is now only 14 points to close the gap to a golden, so it may happen in the next couple of weeks. Let’s hope so.
No surprises on the longer-term chart. The bounce off the uptrend remains intact.
SPYG Charts
SPYG is looking nice, trading above correction territory and right on the 200 SMA. There is not less than $1 between the 10 and 200 SMAs so the golden cross may happen quite soon.
As for SPY the bounce off support continues in place.
QQQ Charts
QQQ is also out of correction territory and consolidating just under the 200 SMA. There is now only 10 (approximately) points between the 2 SMAs so a golden cross may happen soon.
The weekly chart shows the bounce just like SPY and SPYG. What is interesting is that the trend line (red dashes) may prove resistance and that would be at the 500 level. I love round numbers, and it is surprizing how often the market does too.
VIX Chart (Volatility)
The VIX is down, but not yet in low-volatility territory. I am wondering if it is going to bounce again, and establish the uptrend that I suggested last week.
ITMeter
Technically we are neutral, so no action. Privately, I feel optomistic and that we are ready for a bounce and that soon we will see it pointing to the bull. But that’s just an opinion, and we go with facts not feelings.
The week ahead
I have just seen the headlines that there has been some sort of trade deal reached with China. If this is correct, then expect the markets to jump. How long the jump will last, I don’t know, but it may catapult us out of consolidation.
The futures
Wow! I’ve just looked at them and they are up a crazy amount! It should be a good day and we may soon see our golden cross.
Meanwhile en France
I have finished my French immersion course, and I can say, sans doubt, that I was the worst French speaker there! My French improved, but it was humbling to chat with other students who already knew 5 languages and spoke English (not their first language) perfectly. Oh, well, I tried – and they gave me a certificate (I think it should say ‘participation’)
Here’s where it is – BTW, I’m not getting paid to do this, and they don’t know I am doing it, but highly recommended.
Right now, I am going to jump into my hire car and drive up Mt Ventoux for a great view of Provence.
Fingers crossed for a good week!
(and hoping for a golden cross soon!)
Heather
Trade the tide, not the waves
26 Responses
Hi Heather!
Question on rolling options: If we chose 60% strike, should 45% rule to roll up back to 60% be used or 55%?
Hi v3vd9s+ (can I call you V3v for short?)
The choice of strike is entirely up to you – the higher the strike the higher the risk.
But I prefer to keep mine at the same level – mostly 60% because it make working things out in your head so much easier!
Hope this helps
h
Thank you, Heather!
Sorry for my weird nickname;
Sorry I mean given we pick 60% strike to get IN, at what time we roll our options up?
Do we roll-up when our option strike-to-SPY price goes below 45% or below 55%?
I was not able to find answer in the book or backtest files.
Hi – sorry, having a rather torrid time travelling- see today’s blog – so can’t give you a definitive answer right now – but a ROT (Rule of Thumb) would be 10% below the percentage you bought in – so buy at 60%, roll when 50%.
Hope that makes sense.
h
Hello Heather,
When you talk about rolling your options, in the ITM bull book, do you have a specific percentage gain you are looking for out of SPY before rolling ? Does it differ whether you bought in at 50 or 60 percent ITM ?
Thank you for your time
Hi Joe, No, I don’t have target gains, ITM stays in a trade while the 10/200 Golden cross is in force – i.e. until there is a 10/200 death cross.
The main reason that you roll options is because they are running out of time, and you want to ROLL OUT. For example, it you bought an option with 9 months to expiry you would see after 8 months and buy another 9 month to expiry option. That counts as the same trade as you are just updating your position.
The other reason you would roll is to ROLL UP, because SPY has risen a lot since you bought the option and you no longer have your original leverage. For example, let’s say SPY was trading at $600 and you bought a 50% option with a strike of $300. 4 months later SPY has risen to $800 (oh, yes, please!) which means that your $300 option is now at a strike of 37.5%. To maintain 50% you would roll your option and buy one with a strike of $400.
Hope this helps
H
Heather, thank you for the reply !
Sorry my terminology was off I’m still green 🙂 In your example you waited to “ roll up” after a 33% gain in SPY. (200/600) . I guess my question is more to the idea of staying within a certain leverage range . For instance SPY moves from 600 to 660 at 10 percent gain ( oh yes please as well 😉 meaning my original 300$ 50% choice is now at a 45% leveraged position, so basically im asking do you try to maintain a certain leverage range in order to continue to maximize gain ?( ie no lower then 40/45 or 50/55 )
-Merci
Hi Joe, sorry I misunderstood.
I wouldn’t get too hung up on keeping the percentages absolutely correct, but as a rule of thumb if you started at 50% and were doen to 40% then definitely roll. I usually combine rolling up with rolling out and kills 2 birds with one stone (so to speak!).
h
Thanks for writing your book Heather! According to what I’m seeing, the signal has triggered on SPY, SPYG and QQQ. With that said…I remain cautious since we’ve made this move up so fast and we’re sitting with some resistance overhead. QQQ is approx 3.75% from its ATH. I’m perhaps willing to risk that 3.75% and see if we clear the resistance. I realize this is goes against following a system and your backtest where emotion is not meant to play a part.:) Curious what your thoughts are. Also how I join your email list?
Hi Michael – yes, I think you are on the email list – it is an automatic process, I only see the exceptions. If you get an email on Monday morning then you will be sure, otherwise get back to me.
Re the system – it was backtested with no emotion – buying the day after the golden cross was confirmed no matter what other levels we saw.
Having said that I remember December, Christmas 2018 when SPY briefly dropped into bear territory although QQQ had bounced strongly – it would have been the perfect time to wait a couple of days, especially with the holidays and shortened trading day – but a rule is a rule and the backtesting bought anyway. The ITM results would have been quite bit higher if we hadn’t sold and had to buy in again.
So, in answer to your question – that is completely your call – as I say in the blog (not yet published) it probably won’t matter if you wait a couple of days because bull markets tend to move slower than bears. But the backtesting is completely emotionless.
Hope this helps
h
Thank you for responding despite being on vacation and having some recent travel adventures to keep you occupied! J’aime bien la France! (hope I got that right):)
Heather
I was wondering if you have a summary of your ITM trade rules? I’ve read your book on my kindle a few years ago and also bought the Compare Options Strategies paperback. But I’ve forgotten a lot of the rules and on the kindle and it’s difficult to skim the main points esp on a Kindle. Each chapter has a different rule to remember . Is there anywhere you can refer me to that outlines / summarizes your ITM trade rules. Both entry and exit, etc.
Hi Jason
The ITM bull rules are simple (almost embarrassingly so!):
BUY when a 10/200 SMA golden cross is confirmed (as in you can see that it has actually crossed, not just touched)
SELL when a 10/200 SMA death cross is confirmed.
BUY a SPY 6+ month option with a strike of 50% – 60 % of the current price.
ROLL OUT one month before expiry
ROLL UP if SPY moves up significantly (more than 10%)
Will be going through this in this week’s blog.
Hope this helps
h
I’m using TradingView. The Golden Cross appeared on SPYG Tuesday and QQQ on Wednesday. Why are they both one day ahead of your call? They both had .005 space.
Hi Michael, possibly because it is an EMA (exponential moving average) not an SMA (simple moving average)?
I use OptionGear charts and for QQQ the cross was on the 14th, confirmed on the 15th so buy in would be on the 16th. For SPYG, the cross was on the 13th confirmed on the 14th and buy in would be on the 15th.
I prefer the SMA (and that is what backtesting has been done on) as it is clean and mathematically clear and easy to check.
Hope this helps
h
We all have friends…
We’re fishing so I ask my buddy…
Is it a baby bear or correction? He goes it’s an “ aberration “ because it was caused by Trump’s tariffs not caused by any fundamental change in the economy. My next question…
where we going for lunch ?
r
Hehe – so what did you have for lunch? Everything is an ‘aberration’ as in we have never have exactly the same situation as we’ve had before because of the passage of time. Circumstances change all the time. They are all ‘aberrations’ – and when you have enough ‘aberrations’ that becomes ‘normal market behavior’!
Just like that for most people no Monday is exactly the same as any other Monday – but I’ll bet most Mondays they do pretty similar things. It’s the same with the stock market.
BTW – what did you catch?
h
Heather,
We can’t wait for the next blog post 🙂
Hey Ruben – thank you – I have written most of it, now let’s see if the connection holds long enough for me to get it up!
Hi Heather,
Hope you’re enjoying France? I can’t locate what the percentage of space we look for between the 10 sma and the 200 sma. Could you help? Thanks.
Michael
Hey Michael – I can’t remember either – it’s in the books and I have no access to then. But what we are seeing in QQQ and SPYG is unequivocal white space, but not yet for SPY. I’ll do a special email (connections willing) when that happens.
I see that right now, SPYG is at a Golden Cross. It’s 1:44pm EDT and the market will be open a few more hours. Should we wait until after the market closes to verify the Golden Cross?
Hey Sean – I would wait until verified – so that means waiting for the close.
While SPYG has been backtested on its own, I note that neither SPY or QQQ have completed their golden cross, which would reinforce the decision to wait for confirmation.
Personally, I am not going to move until confirmation after close. And still may hesitate if the market turns down.
While the backtesting goes from golden corss confirmation +1 day the results are not hugely different if we wait a day or so for more confirmation (its not like we have to move fast as in a bear market)
Hope this helps.
h
Heather,
Yes, this helps a lot. Thanks!
Have you thought about using SPLG for small accounts instead of SPYG? SPYG is a “growth” ETF it doesn’t track the S&P exactly, but SPLG does. Plus the option chain for SPLG looks like it has more expirations and liquidity.
I will have a look at it when I can get online. Currently answering these questions offline. Having said that, I did check out all the alternatives I could find, and chose SPYG as it tested out the best, but I will have a look at SPLG.