Is the bear leaving us?
In the blog last week, I foreshadowed that the ITM IN signal might happen this week. And guess what? It has.
The golden cross itself happened on the 29th March, and was confirmed on the 30th March when we could see white space between the 2 SMAs. If we are following the ITM then we have to say goodbye to the threat of the bear – for now at least.
Obviously, there are always doubts: is this a good day to get in? Should I wait and see what happens? That is up to you of course, but the backtesting has been done following the rules implicitly with no subjectivity. But lets look at some pros and cons.
Upside Tasuki Gap
In the chart below I have outlined the golden cross with a rectangle. It is quite clear that the SMAs have crossed, and are not just touching. It is also an excellent example of a three- candlestick pattern: the upside Tasuki Gap.
The Upside Tasuki Gap is a continuation pattern, which means that if it occurs in an uptrend then the uptrend is likely to continue. The gap between the first and second candles shows that the buying pressure was strong. The third candle shows that the bears were trying to move the price lower, but – this is the crucial bit – they can’t close the gap between the first and the second candle.
Because the bears could not close the gap that suggests that the bulls are stronger and the uptrend is likely to continue.
Too far too fast?
Since the low point on March 14th , 10 out of the 12 candles have been green and SPY has had a gain of 9.3%. That’s huge and may give us pause for thought. (Paws for thought? Groan. Bad pun.)
Has this ever happened before? Well, yes. The 12 days after the Covid bear reached its low point, SPY gained almost 20%. However, that was pulling out of a bear market, and this time we didn’t get close to bear territory, so the comparison may not be valid.
Which option should we buy?
Options are expensive at the moment because of recent volatility, so we are paying more for time value. That’s why it is extra-crucial that we buy options that have less than 1% time value.
I have been checking the options chains to see what options fit the ITM criteria. SPY is currently $458.7, so 1% above that is $463.29. This is our benchmark. We have to look for options that give us an effective price below that.
If you want to go for an expiry date of Jan 23, then the effective price of the 250 strike is $462.60 which is within the bound ($250 strike + $212.60 premium).
I understand that paying $21,260 for an option may be out of reach for some accounts, so if this is the case then I would suggest moving to a closer expiry date, September 2022. As long as we can get an effective price less that 1% away from SPY, then we can go for it – we just have to be aware that we will have to roll in August this year.
The September 340 strike fits the criteria, with an effective price of $463.18 ($340 strike + $123.18 premium) which is also within the bound.
For the prices above I have been using a buy price halfway between the bid and the ask.
Smaller accounts
I have had lots of emails from readers asking what to do if they have smaller accounts. I am bringing out an updated edition of In The Money: Bull Market Strategy, and I am hoping to be able to introduce a new strategy specifically for smaller accounts which can’t accommodate a SPY option.
So far I have done heaps of backtesting on various instruments, but none has satisfied me yet. I’ll keep trying!
I haven’t sent out an email, because I figure that people already have a lot to deal with and once every 2 weeks seems about right. I also figured that after the heads up last week that people would have noticed the IN signal and come here to see if I had posted.
I hope I am right!
Happy trading.
