Trade The Journey

Trade The Journey

A thought:

Top of the Morning. As the third quarter of earnings continue, companies continue to beat earnings estimates. To date, over 83% of the companies who have reported have exceeded earnings estimates. Overall, I’d say the guidance has been positive although, some companies are forecasting a continuing challenge in supply chain management. Towards the end of the week, a one trillion dollar infrastructure bill was passed. Next on the agenda is to pass another one trillion dollar spending bill.

Close to two trillion dollars will begin to circulate in the economy.

The FED stated that it would begin winding down its monthly bond and mortgage securities purchases. The Fed didn’t mention raising interest rates directly, but the interest rate swap market implies that the Fed will raise rates in 2022. Central banks around the world have taken varying approaches to curb inflation.

The Bank of England echoed the Federal Reserve’s sentiment toward inflation. From what I gather, the Fed is anticipating that inflation remains transitory, and when the labor market and supply chains stabilize, inflation will ease. Could the Fed be making a mistake in assuming that inflation is transitory?

The labor market report for October shows a decreasing unemployment rate, an increase in job openings, and a slightly higher wage rate.  Reports also showed labor costs rising. Job openings increased most in leisure and hospitality. Consumer credit use trended higher; signaling consumers are confident in the economy’s upward trajectory.

Total construction declined to supply chain pressures and higher costs for builders, especially on single-family homes. Manufacturing saw its seventh month of expansion with the same issues like rising materials costs challenging its continued expansion in the future.

Companies are flush with cash and will return to share buybacks.

Imports for the US hit a fresh high. Crude oil retreated from its recent high of $85. Opec has stood firm on its level of oil production despite the urging from the US to increase production. Analysts are forecasting the price of crude could reach $100 in the near future.

China is facing a slowdown, although its government is seeking to downplay it. The real estate sector faces challenging times ahead. It turns out that other real estate companies besides Evergrande are potentially at risk of defaulting on interest payments.

Analysts in this sector are having trouble finding where all the loaned money came from and needs to go due to the cloudy financial picture of these real estate companies.

Chinas bond market is garnering interest from international investors as the country opens up to global investment.


Indices Chart Review:

Russell 2000

Almost nine months have passed since the Russell 2000 entered a sideways trend. Looking at the steep upward trend before the sideways pattern, I’d say the sideways trend was also an accumulation stage. A new all-time high was made this previous week.

S&P 500

The uptrend continued in the S&P 500. The 20 SMA crossed the 50 SMA confirming the uptrend. Look at the size of the bars on the daily uptrend; it looks like a steady grind up with limited pullbacks. The week ended with a Doji at the high of the week. The weekly shows a beautiful trend up, coinciding with the recovery in the US economy.

 

Dow Jones

After using 35513.18 as support, the trend up continued for another week. The 20 SMA crossed the 50 SMA confirming the uptrend.

This upcoming week should be interesting for the Dow.

Nasdaq

The Nasdaq broke through the 15378.12 resistance level to close the week out near the highs. Yields dropped this week, which assisted the Nasdaq trend up. Looking at the last candle of the week, could a pullback occur this upcoming week?

All of the indices are near their all-time highs, reflecting the positive risk-on environment. Bitcoin remained close to its all-time highs. Cryptocurrency is in an exciting stage of acceptance, as countries adopt the currency as a legal tender. New meme cryptos are sprouting up as people look for the next get-rich-quick crypto.

It’s hard not to get caught up in the atmosphere as I found myself taking a serious look at some of the meme cryptos.

I can’t and will not attempt to call a market top in this current environment. Remaining on the sidelines during this epic bull run will remain a challenge. I have been looking for investments that can survive a severe pullback.


A brief thought:

GEO resumed its upward trend and broke through the $8.31 resistance level. GEO closed the week at $9.56 on strong bullish volume. I exited the trade at $7.68. The debit spread I placed had a delta of seventeen when I closed the trade.

The spread ended the week with a delta of sixty-eight. I placed a pink arrow on the chart indicating I closed the trade on the low of a pullback.

The option lost close to 60% of its value on the pullback, which is why I closed. It’s easy to look back and comment on what you should have done. I spent the entire week reflecting on the trade and why I closed too soon.

I saw the pattern and knew the probability of the spread finishing in the money as highly probable. You could say I opened the trade at the wrong time. However, when I opened the trade, the delta was a thirty-nine indicating the spread was near the money.

Instead of breaking through the resistance, GEO pulled back to the 50 SMA. Perhaps placing the trade at the 50 SMA would have been a better trade. I would have paid $17 for the premium of the spread instead of $33.

I could have also waited to see how GEO would react being close to the $8.31 reference level. The option trade had about three weeks left before expiring. GEO also announced earnings that missed earnings estimates after meeting the forecast the previous quarter. The buying volume came close to matching the same volume on the last quarterly earnings report.

One thing I failed to do, was check the stories surrounding the latest earnings report.

Lessons:

Wait to see how the stock reacts to the reference level before placing the trade.

Wait to place bullish trades on pullbacks of a bullish trend or pattern.

Read any surrounding stories on the upcoming earnings report.

Establish close-out criteria for the trade.

Better understand how the greeks are moving.

These lessons me more to me experiencing them instead of reading about them.


Cash flow review for the past week:

I’d say the week ended well. I was able to keep my spending within a manageable range. Any credit card purchases made were immediately repaid to ensure my card balance did not decrease.

Grade: C

Reason: Purchases stayed within the spending plan.

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