Trade The Journey

Trade The Journey

Reflections VIII

Top of the Morning! The week ahead will be a day shorter due to the Thanksgiving holiday. I can’t see too much action occurring towards the end of the week. Fed chair will be announced this week. The FOMC minutes will also be released.

The FOMC minutes will provide a little more clarity on its monetary policies. I’d like to see if they continue to maintain their stance on inflation being transitory. Gas prices are increasing across the nation, particularly in California.

So far consumers have been able to absorb the increase in prices but for how long?

Bond yields remained elevated throughout the week as inflation persist. As the earnings season winds down, one thing is clear, companies have been able to pass on the rising cost of production to the consumer successfully.

Most companies beat their earnings expectations comfortably.

Parts of Europe reinstated their lockdowns to avoid another coronavirus resurgence.

The US is also seeing an increase in Coronavirus infections.

Housing permits increased but housing starts have been decreasing. Higher costs for materials, among other factors, have hindered housing starts. The construction industry is also seeing a decrease in available laborers as people shy away from the industry.

The housing industry is a key indicator of the health of the economy. Here’s a link to the Mortgage Bankers’ association to their blog, here.

Business sentiment rose alongside inventories, indicating the confidence businesses have in the strength of the economy. Unemployment initial claims came in lower than expectations as people returned to work. However, there is a large number of people quitting their jobs.

Import and Export prices rose, highlighting the global challenge of inflation.

If I could sum up the economic data releases in a couple of words, it would be, the economy has remained resilient in the face of inflationary pressures.

But for how long? We will reach the economic peak at some point, signaling the end of a historic bull run in the market. Things have been improving as we return to everyday life.

Company balance sheets will determine how the market handles the end of a bull market. The low cost of debt has helped to fuel this historic bull run. I think the goal of every investor should be to be well-diversified in mostly high-growth companies while also maintaining more minor positions in stable growth companies.

Of course, this allocation would switch near or directly after the peak. It’s tough to pick a peak, but becoming familiar with some of the indicators listed above can assist.

Understanding which sectors perform well at different stages of the business cycle can help you successfully reallocate your investment positions to limit losses and risk. Risk will always exist so manage it well.


The Technical Story

Russell 2000

The Russell retreated from its all-time high after finally breaking through resistance. On the daily, 2317.6 served as a longtime resistance level. Will the bullish trend continue using the 2317.6 level as support? I think the 50 SMA confirms the strength of the bull trend when it bounced off the 200 SMA on the daily chart. It also looks like the 50 SMA could serve as a dynamic support level.

S&P 500

The weekly pattern looks poised for another all-time high, although I doubt it will be made this coming week. We can see that the last two weeks didn’t see much action as confirmed by the size of the candles. With the daily, I can see some sideways actions for this upcoming week. Before the pause during this past week, the bull push-up was almost vertical.

Dow Jones Average

The dow retreated back to its support line a second time evidenced by the daily. The weeklies show two consecutive weeks where the bears pushed the average down. It doesn’t look like the Dow is strengthening towards another high. I could be wrong, but I see some sideways action coming.

Nasdaq

The Nasdaq made a new high after a brief pullback on the daily chart. The weekly shows a hesitation at the top but I’d say the Nasdaq could make another high. You could also say the daily shows a nice A-B-C wave pattern ending the week with another all-time high.


Reflections

For learning purposes only…

Case study: Facebook

The charts: Daily and Weekly

I’m looking at the weekly option chain for the week ending on December 3 which is about two weeks away. Implied volatility is roughly the same for the call and puts across the strikes.

The current Implied volatility (IV) is 35.05%. The current historical volatility (hv) is around 24%. Current Implied vol and historical vol are around their normal levels. The IV percentile is 41% and the HV percentile is 35%. These levels indicate that IV has been higher 69% of the time and HV 65% of the time.

The delta is 21 indicating a 21% chance of ending up in the money. With the gamma virtually non-existent, how will this option react to directional movement?

Volume and Open Interest on this chain are highest for the 350, 355, 360, and 365 options.

A possible play could be a bull call debit spread using the 355 and 365 strikes. The 355 call is a bit close to at-the-money with a delta of 34.

Looking at the charts:

Volume has been slightly higher than the average for the past month. It looks like a change in the character of the trend after this deep pullback is being signaled by the charts.

As a trade, I think trying to play for the 373 level in the next two weeks wouldn’t be an entirely bad move. However, this position will be expensive to be maintained with a theta of over ten cents using the bull call debit spread strategy.

The weekly shows that the 20 SMA served as resistance while the 50 SMA served as support.

Looking at the put side of the option chain, there was low volume and open interest as compared to the call side. I thought about a straddle but I think the call debit spread might be a better play.


Cash-flow management for the past week:

I was successful in saving the needed money for my root canal procedure. The procedure was expensive and I paid a little extra for the location and expertise. However, the procedure was quick, professional, and performed with limited pain inflicted.

The business specialized in performing root canals. This experience showed me how important financial management and freedom are in America. Without money or insurance, the dentist would have pulled the tooth. I’ve been in that position before and I can tell you that having a dentist pull your tooth when it could have been saved is a terrible feeling.

I strive to save first and spend last so that I won’t have to experience that dilemma again. So far, I’ve been successful. I’ve come to accept that a large expenditure or emergency expense will occur more often than thought so I need to prepare for the unknown by saving.

Grade: C+

Reason: Continued Improvement.

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