Trade The Journey

Trade The Journey

Doubt

Top of the Morning. What’s happening, or should I say what’s influencing the market?

I guess you can say the usual events that move markets from here to there. Housing demand remains strong across the nation. Although the Fed has said it will begin tapering, it has not indicated when a tightening will begin.

The summary, released Wednesday, indicated the tapering process could see a monthly reduction of $10 billion in Treasurys and $5 billion in mortgage-backed securities.” ~ CNBC

The Fed has indicated that it will begin tapering in mid-November. Open communication is a tool of the FED to smooth transitions in its monetary policies. Had the Fed kept quiet about its intentions, it would surely disrupt the market.

Tightening has not been brought up in any of the talks or communications by the FED. Tightening, as I understand, is a more intensive process of raising rates to combat an over-heated economy. The Fed also adjusted its rule for its board of governors, limiting their participation in the market.

More than one Fed board member participated in trading and investing in the market while setting policies. Earnings have continued to prove the resilience of the US economy with most companies beating their earnings estimates. Consumers have absorbed most of the price increases but there will be a point when the consumer can longer afford the increases

If you are unaware of Business cycles, I suggest you become familiar with the continuing cycle of economies and markets. Howard Marks has a book called, “Mastering the Market Cycle: Getting the Odds on Your Side.” I highly suggest you read this book.

This coming week of earnings will be closely watched, with Apple, Microsoft, Google, Amazon, and Facebook reporting.

I created a chart that shows the yields of the five-year, ten-year, and thirty-year. The five-year has continued to trend steeply up, while the ten-year yield approaches its highs of March and April. The thirty-yield is trodding along in a slow-moving sideways trend.

The ten-year is probably the closest watched metric for mortgage rates and borrowing rates. Bonds’ prices and yields move inversely to each other and indicate the sentiment of investors. Rising yields indicate a risk-on sentiment, meaning people are selling bonds to pursue more aggressive investments, vice versa for falling yields.

Evergrande made some of its payments, but another growing concern is that other real estate companies in China are defaulting. So far, the crisis has been contained, but there are increasing signs that China’s growth is slowing.

Is there a coming energy crisis? Well, in some countries around the world, they would say yes. The winter temperatures will assist in determining the severity of the energy crisis.

In my opinion, this bull run is fragile, so I’d trade cautiously. A good indicator of the current risk sentiment is cryptocurrency. Cryptocurrency still remains risky because of the many variables affecting its price.

That being said, Bitcoin reached a milestone with its first ETF being approved and opened for trading and investment this past week.


Indices Chart Review:

Russell 2000:
On the chart, you will see two resistance levels at 2302.22 and 2317.6. A short uptrend began last week, which might have some legs left to make it to 2317.6. Friday didn’t give back much. 2317.6 will be a good test but judging by the past action, a retreat could be expected.

S&P 500:
The S&P rocketed through 4481.07 to close at another All-time high. The run continued from last week, kicked off by banks reporting positive earnings. A doji candle capped off the end of the week which could indicate a small pullback in the week ahead.

Dow Jones:
3450.86 was overcome to make a new All-time high Friday. Last week showed a nice uptrend. Look at the candle highlighted on 10/13, a dragonfly indicating the bulls stepped up.

Nasdaq:
The Nasdaq gapped up to recover from the short-term downtrend but faltered, approaching the All-time high. This week will feature some volatility as the tech giants will report their earnings.

As a swing trader, market current events are important to me, as an investor not so much. Inflation, supply chain challenges, labor shortages remain hot topics for financial news publications.


Doubt:

As a stock trader, my primary concern is the stocks’ direction and, to a lesser extent, speed (Volatility). As an options trader, speed (Volatility) is a primary concern, with the direction being secondary.

Last week, I purchased a call debit spread on GEO with the idea that it may make a move upwards. I bought the $9 call and sold the $11 call. The position had a delta of 37 and gamma of 26 when I put on the trade.

The gamma is somewhat large, indicating the delta slope to be steep if GEO makes an upward move. A delta of 37 indicates a 37% probability of closing the position in the money. It’s also close to being at the money.

This past week showed little action upward as GEO drifted sideways after the large buying bar on 10/8. I guess the good news is that GEO is still holding up around the 50% level of that sizeable green bar. The bad news is that GEO closed on its low.

One drawback to trading options is that time is money. Theta is eating away at the value of the option with every passing day. Implied volatility increased about four percentage points from 59% to 63%. Historical volatility has remained steady.

It looks like GEO will test the 50 SMA within the coming week. On 11/9, the earnings are due to be reported for GEO. The debit spread expires ten days later. There are no dividends issued for GEO.

$8.31 remains as a fundamental reference level. GEO traded around this level for the entire week. I need GEO to make a large move upwards. The down days show less volume than the up days this past week, which could be a sign of accumulation. Volume for GEO remains below its average.

If this trade fails, this will be my twentieth losing trade in a row. It’s hard losing week after week, but I guess it’s a part of my education. Most of the mistakes I’ve made have been oversights, meaning I missed a detail.

I can honestly say that learning to trade is about noticing the small nuances, and that skill can only come from experience. The position has declined 40% since opening the trade last week, a tough pill to take.


Cash-Flow this Past week:

Money seems to be leaking from my checking account daily like small drops of sand in a time cylinder. I try to save as much as possible. It takes a solid resolve to avoid spending on life’s daily pleasures. I’ve read many stories of people saving close to 70% of their income to retire early.

I applaud anyone who can save that much of their income. For me, I can comfortably save close to 30-40% of my income. Every week it seems that I am adding a new major expense to my calendar. Whether it’s my car that needs maintenance or a tooth that requires a filling, it’s always something new.

Sometimes, I find myself questioning if my financial goals are achievable. Looking at the result or goal can discourage you if you’re far away from it.

This past week, I ran close to five miles, my first time doing so. Instead of thinking or looking at the entire distance, I focus on the road ahead and take the next stride. I keep my head down, looking only at the road ahead to avoid distractions and self-defeating thoughts of resting or giving up. About 85% of the time, it works, and I achieve a new milestone.

It’s the same process I use to achieve my goals, day by day, the road to the destination is built.

Grade: C
Reason: Continued resolve.

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