Why I’m watching banks as closely as I watch oil

If you have followed the stock market for the last year or read the financial news than it’s clear to you that the market will go whatever direction oil is headed. The stock market has always been correlated to the price of oil but right now oil is king and has authority on the direction of the market.

As a trader of US stocks and options, in this environment it is extremely important for me to follow the price of oil before putting on a short-term trade. The volatility in oil will have a highly correlated impact on my trade. This has been increasingly accurate for last past 16 months. Right now I am anticipating a day where oil is no longer king of the castle. I do believe that sooner or later (probably later) the price of oil won’t rule over the stock market like it is today and this will mean that I won’t have to monitor the price of oil as closely. One forward looking question to consider is what sector will take the place of oil as ruler and controller of the markets fate?

When oil prices begin to stabilize the market will find strength or weakness elsewhere. That is why I’m watching banks as closely as I watch oil. The oil industry is also linked to the banking sector and “the financial system must absorb all the short-term negative repercussions from oil at current prices or lower – the bankruptcies, the junk bond defaults, the hit to corporate earnings, the lower growth in emerging markets – before the correlation breaks”, Sumit Roy in Why Stocks & Oil Are Correlated.

The financial sector, as measured by the exchanged trade fund $XLF, showed more relative strength at the end of the week compared to oil, recovering up 12% from it’s low to close, while the United States Oil Fund, $USO only recovered up 7.7% from low to close (see charts below). I don’t know if this is the start of a long term sustainable rally in financials or a smoke-screen to disguise what’s really happening in the economy, like I discussed in “re-evaluating S&P levels“. Like I said the market is guilty until proven innocent so I favor the later point of view for now.

XLF.week1

USO

If the market is headed higher next week I think it will be on the back of oil and financials. I’m closely looking at a trade setup in the financial sector. From a technical perspective the chart of $XLF looks like an inverse head-and-shoulder pattern, which is a bullish chart pattern. See chart below. You may wonder why I would be willing to put on a long trade if I believe this is a smoke-screen setup. The answer lies is the word “trade”. This is not an investment. This is a short-term setup which could last a 2-4 weeks. I’m not sure what exact trade I will put on but stay posted as I will share it right here. Symbols to watch, $XLF, $FAS, $SEF, $FAZ, $BAC, $WFC, $JPM.

xlf

Further good reads:

March wish list: Stock, oil price correlation needs to get broken. 

Marriage of crude-oil prices, stocks at historic level. 

Correlation Between Oil and Stocks Highest Ever Since 1980

 

Re-evaluating S&P levels

On Feb 18th I wrote a blog on the current S&P 500 levels and where I thought the market was going. See blog here. When I wrote this blog the $SPX was between $1915 and $1930 and  I thought the $1940 level could provide resistance for a good short-term, short trade setup. This was a tremendous upward move from the Feb 11th $1814 level however the momentum continued and the $1940 level didn’t provide the resistance I hoped for.  Now that we’ve been hoovering around $1950 for the last couple days my view on the market direction has changed.

We are at a pivot point! There are many market moving events in March that can instantaneously shame any chart or technical analysis. As a short-term day trader I prefer to use technical analysis but when game changing events are in the pipe it’s important to consider the news before taking on a heavy position. Some of these events include; G20 summit this weekend, Mario Draghi and the ECB on March 10th, Janet Yellen and the FOMC meeting on March 16th and a host of other important data points (unemployment, GDP, Jobless claims, etc).

Also, it is very important to consider what can happen in a bear market. Take the 2008 market crash for example. In January 2008  the S&P 500 fell 14% in the first 3 weeks, forming a double bottom, which then reversed and rallied 15% for the next 8 weeks. When the euphoria was over the S&P rolled over to make new lows in the following months. It’s scary to see how closely correlated the 2008 chart is with what we’ve seen so far this year, see charts for comparison.

Image-1

So where does this leave us? Without a crystal ball it’s very hard to tell. Right now, my pessimism still outweighs my optimism in terms of the market having found a bottom. Cynically, I believe that news related events in March will be positive enough to create a smoke screen which soothes investors into forgetting the blood bath we’ve recently been through and believing that the good times are back!   This would be great, but I don’t want to follow blindly without real confirmation which would come in the form of oil and banks turning around, earnings increases, China, interest rate hikes, etc. These things could all help pull us out of this rout but after the recent carnage we’ve seen this year the market is guilty until proven innocent!

So what to expect. If history repeats itself we could push back up to the $1990-$2000 level on the $SPX, which would tag us at the 61.8% Fibonacci levels from the November and January highs respectively. If economic conditions haven’t substantially changed for the better this could be the point where we roll over to see new lows.

Depending on the market sentiment, tone and momentum, I will look to short at the $1980 and buy at the $1930 level. At these levels I will be comfortable with my location but will be quick to take profits and cut losses.

Chart below is the 60 minute look at the $SPX from Nov 2015 highs to present

SPX.2.26

I will provide an update to this chart at the end of every week!

A well managed PCLN trade reaps %164 gain.

Yesterday my alert triggered on Priceline when the stock dipped below $1,260. In my view, this is an early indication that traders are starting to take profits, especially as volume has dissipated after a huge reversal from  $960 to $1,280.

The problem with this setup was that the $1,260 price wasn’t an optimal location for an aggressive short trade. My risk/reward needed to be well managed since the probability for a successful trade wasn’t as high as I’d normally like. However, one of my core tenants is that prices will revert to the mean and my alert meant that it was a good time to at least dip my toes into the water!

I started by scaling into the $1,250 put options. I was setting myself up for a successful day trade if the stock dropped $10, down to $1,250.

PCLNfills. 2.23

I knew that I might not get an immediate drop that same day and the price started going against me after my first purchase. At this point I decided to scale into 5 more contracts with the intent to reduce my cost basis. My average price per contract was $8.94 and I managed to scale out of 5/6 contracts for a profit before the close. This morning I sold my one contract for %164 gain. My intent was to only hold one contract overnight which was a risk I worth taking!

PCLN2.23

We are still waiting for a re-test of the bottom channel, which would currently be around $1,310, see blog post for chart and details. Perhaps at this level, I may look at a longer term setup and sell a vertical call spread.

 

Tesla, a good risk reward short trade

Today TSLA opened and headed right into the $180 range. At this level, my inclination is to start looking for short opportunities anytime it’s above this range. As you can see by the chart, since 2014 $180 has been significant support for TSLA until it recently broke below it at the beginning of this month.

TSLA.daily.2.23

I decided to dabble in this trade idea, lightly buying to open the Feb 26 $180 put options. I sold most of the these within 20 minutes and at the end of the day closed almost $1000 in profits. This trade was more about testing the $180 level than it was about hitting a home run and my conviction in the trade setup paid off. Also, I was really tempted to add back my position when it retested $180. It would have been the right call, but sometimes it’s better not to over-trade and over-think things. In this case, knowing I was right was good enough.

TSLA.2.23

TSLA.fills.2.23

Amazon update

I sold the second half of my second AMZN short position put on last Friday before the close. The position wasn’t moving quickly enough in my direction, and the price action didn’t justify holding over the weekend, especially with the premium-time decay on these options.

The channel we’ve been monitoring, which dipped below the trend-line on Friday, provided two successful scalping opportunities. The first on the way down capturing the momentum and then the second upon a retest of the bottom channel trend-line. See the two posts from last Friday, post 1, post 2.

It turns out that taking the money on this trade was the right choice. Today we confirmed that the channel break-down was a false. AMZN gaped up into the $540 range on positive news. At this point, it was probably going higher and I bought 12 of the $245 Feb, 26th calls for $9.85. This was a profitable scalp as it moved in my directly quickly and I scaled out of the entire position between $10.60 and $11.30. I am anxious to buy puts for this week in anticipation of a reversion to the mean. $563 will be my first entry target.

 

AMZNfill2.22

 

AMZN2.22

Amazon retesting the channel low?

I took off yesterdays short position before the close for a decent profit. This morning the strength in Amazon looks to be a dead-cat bounce..in my humble opinion. I entered my first short on AMZN this morning at $519 for a quick and profitable scalp. Obviously the better trade would have been to then turn it around and go long at $516 but no body can time the market perfectly! To me, it looks like the retest of the channel low will be the high for the day $532. I added shorts here and have taken on 1/2 the position at $528. If it breaks below $528 the confirmation of our channel breakout from yesterday will be confirmed.

Follow me on Twitter @Jeffreytief

AMZN_2.19

Gold bugs showing lots of strength

Gold since 2013, as measured by the GLD etf, has been in a downward trending channel but has recently shown a lot of strength and may be bucking this trend. As you can see by the chart, the channel that was resistance since May 2013 looks to be the new support. Does this mean Gold is now a good investment? Does this spell more trouble a head for the market?

To be honest, Gold is not something I typically trade but I am getting interested. Perhaps a good short would be once it reaches $125 and a good long would be if it re-tests the trend line or goes down further to $112-$113. Right now I would like to see further confirmation that a new trend is in place before jumping in. As a trader, selling naked Puts at $112 could be a more conservative trade or an ultra conservative trade would be selling the $112 puts and buying the $107 puts as protection.

With negative interest rates in Europe and Japan, and if the US Dollar falls it may also be a good longer term investment. Personally, I would like to see a pullback before dipping my toes into it however you cannot argue with the technical setup, which is indicating that now just may be the right time to get in.

GLD_2013

AMZN channel broken

AMZN seems to have stalled its upward momentum and the channel indicates it’s breaking down.

Bought 4 of the 2/26 $540 puts. Sold half already for a scalp. Wondering if I should hold the rest through tomorrow?

AMZN fill

AMZN channel

Reaping the rewards with a TSLA short

Yesterday before the close I took a speculative position on TSLA. This was not a sure thing but a risk I was willing to take and I was confident the stock would provide the move I needed to make money on the trade (or at least not lose much).

This morning at the open the options contracts I bought were down 50%. At this point the stock was almost touching $173. I knew I had jumped the gun on my first trade but couldn’t resist the temptation to buy more at a level I was certain wouldn’t hold up for the day, at least not with oil pulling back and the Nasdaq falling!

TSLA is correlated with oil. When oil goes up TSLA usually also goes up. Kind-of makes sense, if the cost at the pump is going to be more expensive, buying a battery operated vehicle may be a good investment, right?

Yesterday the positive news for oil was Iran, Saudi Arabia, Russia, and other OPEC countries possibly freezing production. This (and the market in general going up) helped lift shares of TSLA from $156 to $168. This is a pretty big move for one day, but is in-line with the Average True Range for the stock. Also, TSLA has climbed 22% from the Feb 9th lows (which was also it’s earnings date) to today’s high. My belief that a revision to the mean was in order certainly paid off with this trade.

 

TSLA

As you can see from my fills, I bought the 2/19 $170 put options contracts. This is not a trade for the faint of heart as these option contracts would expire 48 hours from the time of my first transaction, rending them worthless if the stock was above $170 on 2/19. My average cost basis was $2.78 and average sell price $4.03.

TSLA fills

 

SPX Levels

As I look at the SPX I am seeing prior reference points which used to be support and recently turned into resistance. This makes me believe the 1940 level may be opportunity to short the S&P 500. If we blow past that level at the open tomorrow then obviously not and we’re probably headed to 1950 or 1960 before we see some real selling pressure, but if we don’t blow past 1940 and instead creep up to it slowly it could be the next pivot.

 

spx.2.17daily