Hi everyone,
Steven from Investor Invasion.
Let’s get right into recapping the War Room for this week.
The markets are having a tough day as of right now (noon on Tuesday).
The S&P is down 3%. This is in the context of a pretty strong rally we’d seen in the past five days. Now, we’re seeing a bit of an extension to the downside. Shocker!
It’s pretty nasty out there.
I’m viewing this more as a deleveraging and a reset than as the resumption of a bear market. I could be completely wrong on this. Obviously, but the main headline is that the CPI came in hot. Markets were expecting 8% and we saw 8.1% - 8.2%.
What that means is that the nose over that a lot of folks are looking for, the rate of change of inflation year over year is starting to shift a little bit.
What we know now is that the Fed, with the event coming up on the 21st, next Wednesday, we’re probably going to see three hikes, or 75 basis points higher.
This is reflected in the ZQX 2020, which is the November Fed fund futures as well as the December Fed fund futures. A lot of stuff is getting adjusted lower.
We’ve seen this before. We had the CPI crash back in June, and the Fed came in and hiked, and that was the bottom.
We’re not getting exposure to any new information into this market right now. We know the Fed’s going to hike. The question was will they hike 50 or 75.
If you’re an investor, you probably had advance notice of this. What we’re seeing is probably just short-term flows and option dynamics and things like that.
Short-term basis - We’ve got this internal pivot level that I’m watching at about 397-398. Underneath that, we ah ve a pretty important high volume node that’s close to the lows from last week.
We also have the swing AVWAP from June which is crawling up to a meeting with price alla the same time.
If we look at the NASDAQ quickly, the same kind of song and dance. We’re at a level. We’ve got a VLN coming up. We’ve got prior resistance right around 297, which is now potential support.
If we look at the IWM… there’s one one more level coming up with an LVN.
There’s reasonable levels. Can we head lower from here? Yes. We absolutely can. If there’s a fund that’s stuck or there are some option traders that are stuck in this gap, you’re probably going to see liquidations, if we manage to get a bounce.
So the base case for me right now is, the way I'm looking at this, is we can expect range. We’ve got trapped inventory. That’s where we find resistance. We’ve got prior buyers coming in around 393. Then an LVN just below that. It’s reasonable to expect a range right now in my opinion.
I think that a lot of the economic data is getting pushed through. A lot of the expectations of what the Fed’s going is now pushed through. We will probably see a trading range develop going into next week.
That’s my overall thoughts on the market. It’s a hot mess right now, but it’s been a hot mess for the entire year.
With that said, we want to start looking at some setups again.
We went through a lot of option trade setups last week. A good chunk of them paid where you could have taken half off, into a double, even into this ugly price action. We had some pretty strong moves off the lows. With the gap down, we want to start thinking about where we want to play and how we want to play.
Let’s look at natural gas.
One of the issues I’m having right now is that commodity trades are going to be tied to the underlying commodity. If you trade oil stocks, and oil sells off, it’s probably going to rollover your positions as well.
Let’s look at some of our thematic ideas.
Solar continues to be hot.
FSLR - First Solar
I just got short on First Solar. I’m just doing some put calendars. I'm looking for some more reversion. This has not seen a decent multi-week pull back in a while. It’s pretty overbought.
We have had almost 8 weeks in a row, 2 months, trading above the upper weekly bollinger band. That kind of price action doens’ happen very often.
The last time I remember this kind of thing happening was in 2007.
I have a quick study we can look at, so you can get a feel for this streak.
If we back this out to 20 years of data, First Solar does have a propensity to squeeze, but we’re not seeing the same kings of streakiness. The reasons I talk about 2007 is that when FSLR IPO’d, it went on a ten bagger run before getting crushed into the credit crisis in 2008.
I think that there are better setups in this space than trying to play FSLR on its eighth week of extension.
So if you’re interested, not a ton of size. I’m just doing a feeler position on the OCT-DEC 125 put calendar. Basically. I make money on the OCT expiration if we trade into 110 and 140. 140 is the high. That’s my area of profitability. Odds are it’s going to squeeze, because I’m always early into this kind of thing. But I will add to the position. Once we get that hard reversion, I will get some decent profits.
I know that’s kind of an advanced idea, but I think it’s viable.
RUN - Sunrun
This has been on our list for a bit. It’s nosed over underneath a resistance level. We’re starting to see some bids come in.
This is one where if it runs, it runs. There's the possibility that you’ve got some trapped inventory. Odds are it's not going to be a ton. We do have prior support as prior resistance just above where we’re at now. That makes this one tricky. So let’s punt on that one.
SPWR - Sunpower
Same kind of thing. It’s nosing over a little bit.
ENPH - Enphase
Enphase is still the play from what I can tell. I recommended calls last week.
I sent this out to another one of my other newsletter, Precision Volume Alerts. We sold at close to double; it’s about an 85% win.
This looks to be the best in breed for this.
ARRY - Array
This is another one to watch for a potential bull flag pattern developing. This was on our list from 4 weeks ago.
This is a software company that works with solar companies for loading balancing. If it can clear 35 bucks. I talked about it last week. It hasn’t moved, but that’s one in space that we can take a look at.
Some tech names to look at.
PANW - Palo Alto
We’re seen a Boolinger band compression. We have been seeing some sling right into the level. It's a $500 stock so it’s a monster to deal with. We’ve a level at 550.
We have resistance a couple of times, blow through it and fail. There was a gap up on earnings into the resistance level. Almost fill the earnings gap.
We have a 3 to 1 split coming up. So this is now a $175 stock soon (on Wednesday).
Wait until after the split if you want to trade the options market on this.
I would look at the 210 call-buy on some kind of breakout.
CCJ
Cameco still looks great. We want to look for some kind of a reset. We might see a pull back to 28 a share with a 60 RSI rest into that. Then you have a longer term base that the stock could potentially still come out of. I’m still structurally bullish on the uranium space right now.
ALB
Albemarle is breaking out. It had multiple weeks of growth. It had a gap down today and it’s back at highs.
You don’t want to cheat, but this is one of the strongest stocks in the market right now .
When you’re seeing names like this which gap down with the rest of the market then find aggressive buyers, that’s what we call relative strength. That’s something that you want to pay attention to.
LTHM
Livant - This is the same thing, but it found buyers again.
It seems the 32 level is a good level to work from. Round down abit if you want to manage your risk. Use 31.19 as a stop loss level.
It did run tino almost a gap and then started to sell off. Overall, this trend still looks very solid.
Look at a JAN or DEC 40 strike call. I know that's out of the money, but you want to choose out of the money right now. If things completely fall apart in this market, the capital loses that you potentially could are much less relative to the gains… because if the market does make a turn this one if going into run to 40 a share.
Last week, we looked at the JAN 45 call. If we see a push to 45, you’re up a double. Your maximum risk is 200 per contract, which isn’t trash. If you run a stop to 29.5, you’re risking $100 one R is about 37 from here.
That looks pretty good.
LAC
You can probably work with a trigger on a close about 32.4 and look for the push to 40. We talked about this last week.
We looked at this at a dollar. It's currently up $82. Before the market sold off it ran to 31.87.
31.87 would have given you a $100 return on $100 risk. That was double. This is still a good kind of option.
Luke asked what exactly is a trading range and what can we learn/do when we spot it?
Let me get back to that in a second.
ERII
Look for a pullback on this stock. Look for a 60 RSI reset. Look for a pullback to about 24 a share.
I think it’s still a good market to look at these names and start taking shots on the long side, going out to about DEC or JAN. Look at the money options. If you’re skittish about this market, you can buy some vicks call spreads to hedge. That seems like a good strategy going forward.
Luke asked: What is a trading range and what can we learn/do to win?
You have two kinds of markets: a trend market and a reversion market.
When you see a strong trend, it means that we're seeing markup. Any time we see any kind of pullback, buyers are showing up into those pullbacks. You can see footprints with that. What this means is that demand for liquidity is much higher than the supply on the ask side. There are more buyers willing to take out the task on the market, than there are sellers.
The same thing can happen on the down side, where you see continued selling with small bounces. That shows us that supply is overwhelming the market.
We can get a two-way trade. We can get sideways action, where any time we get above ascertain level sellers start to come because their liquidity supply is more than the available buyers. Then we go back to the other side. Obvious supply level on the other side because stop runs. Then we come back to the other side.
When I'm saying we’re due for range action, my assumption is that they demand for liquidity in the less week is going to be less.
There’s some psychological stuff with the Fed and uncertainty. Nobody wants to make a big move now going into the Fed. If you want to put a bunch of size on right now, it’s tough. On the other side, anyone who’s been scared about the Fed has probably already sold over the past four months.
We can also look at the volume roadmap. We can get a feel for the market. Overall, the market’s been in a sloppy reverting range for about a year now. We had the first range up to April, then we have the second range lower to now.
We can see the kinds of price responses as we come into areas of key liquidity. We can see big prices into areas of key liquidity. If the market blows through it, it show you that something has changed in this market
Zooming in, let’s look at this current trading range.
If you look at the volume that’s been built out this entire time, there's very low liquidity in the 400-408 range. We’ve seen gaps around that area. Any time we've gotten to it, we’ve seen swift moves to the other end. What I know is that when the market has broken under or above we see fast moves .This is a very trendy area, because there’s not a lot of liquidity. That's why you don’t expect a range when the S&P trades between 408 and 400 because it’s gonna run to either side.
We can also see that the liquidity is basically where the high was. There was the potential for a continuation trade that probably would have taken the S&P up to about 4400.
Right now the market is selling off. We are joining a liquidity area, prior trains action. Maybe there are some that I want to cover. Maybe there are some longs that I want to buy.
The way the market is trading this was on Aug 24, we had some economic news - Jerome Powell came out with his Jackson Hole comments.
There's a liquidity pocket so there was a gap down. Then you come into a volume shelf. A lot of the time, this is a make or break level. Either we see a hard bounce or the whole thing gets stuck.
There’s no liquidity at 396.16. The market went to 396.16, it tried to climb. It failed. It went to the other end of the range.
Hopefully, this explains the reasoning behind how I’m looking at this. I don’t expect a lot of big moves. I know the CPI was nasty, but a lot of that is currently priced in. We all know what the Fed’s going to do next. They’re going to hike 75 basis points. I’m viewing this as a long opportunity. I could be wrong, but that’s just how I think it’s playing out.
OK.
Let’s look at Regeneron.
Probably good for continuation for three weeks. Look for a consolidative pattern between 720 and 680. If this stock goes sidays for a while. Keep an eye on it. Buy dips, sell rips, while that range continues to get knocked out.
Let’s look at some names we haven’t seen in a while.
Celsius
Has a 60 RSI rest. It broke above. I bought calls. I converted them to ranges. They’re doing okay, but we have a remount possibility if the stock clears back above 110. It’s probably going to go.
That’s the mechanics we see sometimes. We have resistance repeatedly taking out a lot of folks to find liquidity. Then reject and go to the other end of the range.
Since the lower end of the range held, we come back to the resistance level gain. If we take it back to 100, we’re probably going to move.
We can look at the JAN 130 or even 140 calls.
CF
Here we ha a break out, a reversal, we’re looking a failed break down reversal.
Let’s look at the structure we’re looking at on CF right here. It sold pretty well. We have a very clear support level. Breaks down underneath it, then multiple resistance points. Failed to break down next. The initiative buying shows up, then it jjams back above that.
That’s what we should call a field breakdown setup.
This means it’s pretty easy to manage your risk against that resistance level.
Let’s just say a low day stop - about 98.18. What’s the highs, 118, we’re going to look at 120.
Let’s go to JAN 120. It’s going for 5 X 5.40 with a volume of 1, so it’s not very liquid. You can probably get filled at 5.20 5.25.
Let’s say a low day stops at 98.10. That would put your initial risk at 84. If you wanted to take half off at your planned risk at 84, you would need to see a move to 104. 104 is yesterday’s high
This one has potential. It probably requires some massaging or at least some position sizing scaling, I think, where you can pick some up at 101. At 100 flat, sometimes those obvious levels are super obvious. You want to see that 100 level hold. If that holds into the end of the day on Tuesday, that’s worth a shot.
VET
This ran. It was pulled back to a breakout setup. It already had its 60 RSI reset. Recent highs at 30.
Go out to JAN. Look at 30 strike calls going for 1.95.
It looks pretty good. Intraday price action is trashy. We have a pretty pullback to breakout setup here.
One other technique you can use if you’d like…
You can use the swing AVWAP against the most recent highs to clear.
As that swing AVWAP continues to drift. You wait for the stock to close above it. That's your entry. That's more of a swing entry. That takes the guesswork. That way you're buying in strength after the dip.
That’s about it right now. There’s a lot of stuff going on right now. If we start to see the market cool off with respect to its sell-off, the speed at which we are moving will prompt stabilization across the board. A lot of these relative strength names are going to start to move again.
We want to be prepared there.
That’s it.
I will see you next Tuesday.
