XLE Looks Positive

XLE Daily

The applicable part of this Daily chart, regarding this trade, begins at the 65.48 low on 7/14/22. If you draw Fibonacci levels from the recent 94.71 swing high on 11/14/22 down to the 65.48 low on 7/14/22, you'll see the current swing low at 82.65 on 12/9/22 is very close to the 38.2% Fib retracement.

Notice the price action from 94.71 to 82.65 is in a AB/CD format. See the 2 little white, downward angled, diagonal lines. And, the 82.88 swing low 2 days ago made a higher low than the 82.65 low.

Also, Stochastics, on the bottom of the chart, are extremely low at the 82.65 low.

A setup like this can lead to a substantial bounce up to the -27.2% Fib extension at 102.64. It would have been better for me to wait until the Close today to see if we close over the 8ema. Its mid-day and we are over the 8ema but I should wait a few more hours. But I'm going to be busy with other trades I have planned near the close, so I'm going to jump the gun, but use options to limit my risk to a defined amount, which is the cost of the options.

So, I got an XLE March 95 Call for 2.22. I picked March to allow enough time for the trade but also to control the Theta time decay. Also, this option has a 30% Delta, which is an inflection point in the Delta vs underlying curve, meaning Delta accelerates its increase from 30% to 70%.

The Target is the -27.2% Fib extension at 102.64. This also coincides with the price swing from 7/14/22 to 8/29/22, as represented by the thick, white, upward angled, line. The next price swing is longer, which doesn't hurt. 

I almost always shade my entries, stops, and targets to account for slippage and bid/ask spreads. So, my actual exit is when XLE is 102.50.

JNJ No Tears Gartley Pattern - Update 1

JNJ Daily

Great day for our JNJ trade. Got a big candle on big volume with a Close above the 20sma. We bounced off the 50sma, which is a concern, but we've breached it many times before.

We made a higher high and a higher low. The ADX made a bullish cross. Stochastics are still in the mid-range, so no selling pressure from that.

We hit the .5AD level, which is constructive, and we closed in the upper half of today's candle.

The Aug 175 Call option, for which we paid 3.52, had a high today of 7.60. That's better than a double. The voice in my head was quite disappointed when I didn't succumb and sell the option to capture the profits. Especially since I've had trades where I exercised discipline and held out for the target, but the chart reversed the next day and I ended up with much less profit, or worse.

But it looks like we only need one more green candle and we'll hit our 179 target. Plus everything looks bullish for this trade. 

So, bottom line, I held the line and held our position for another 3 points. Looking at the option chain, it looks like between today's stock close 175.74 and our Target 179, we'll get an average Delta of about 60. So, if we hit the Target, the additional profit would be approximately 3.25 * 60% * 100 = $195. 

Seems like holding the position is the smarter trade, albeit the more uncomfortable one.

Hogs Turned Tail

Looking at the April Lean Hogs futures daily chart above, I see some Bearish indications. We should wait until we get continuation to the down side tomorrow, but I will be too busy at the Open tomorrow to be as effective as I can be today when I have time to make a considered move. So, I decided to get in short early even though I recognize this could hurt if it goes the other way.

Here are the Bearish indications I see:

• 3 Drives to a top.
• Bearish Engulfing candlestick pattern.
• Close below the 8ema. 1st candle to do so since the drive began.
• Close near candle bottom on today's and yesterday's candles.
• High Overbought Stochastics.
• High Volume, indicating enthusiasm.

For the Target, you could make an argument the 38.2% Fibonacci retracement would be a good place. It coincides with a Support and Resistance level. We may in fact exit at this level but judging from the Stochastics and the enthusiasm, it looks more likely we'll make it down to the 50% Fib, which also coincides with a Support and Resistance level. I drew 2 thin, white, horizontal lines to mark this S/R level. The 50% Fib is at 98.225.

So, we'll target the 50% Fib but retain the option to get out at the 38.2% Fib if conditions suggest that is a better idea when price reaches it.

Speaking of options, we entered our short position by buying an April 104 Put for 4.4250 points. The Lean Hogs market has no mini contracts and its a relatively thinly traded market that's only opened 9:30am ET to 14:05 ET. With a point value of $400/pt, we need to control our risk somehow, and Options are the only way.

The April 104 Put option cost 4.425 * $400/pt = $1,770. The underlying HE price was 105.550 at the time we bought the option. It had a Delta of 43%.

The best Stop would be just over the recent swing high at 112.850, but that's a little too much money to lose if we hit it. For example, let's say we use a Stop of 113. The loss would be approximately:

113 - 105.55 = 7.45 Points * 43% Delta = 3.2035 * $400/pt = $1,281.40.

So, instead, we're using a Stop that's just over the high of today's candle at 110. It could certainly be hit by a reasonable retrace tomorrow. A 50% retracement of today's Close (105.4) to the swing high at 112.85, would be (112.85+105.4)/2=109.125. A 61.8% retracement would be 105.4+.618(112.85-105.4)=110.0041. We used 110.500 as a Stop, which is over the 50% and 61.8% retracements, but not by much.

Our dollar risk amount is approximately:

110.50 - 105.55 = 4.95 Points * 43% Delta = 2.1285 * $400/pt = $851.40.

I say approximately because the Delta will change as price moves. If price moves against us, then the Delta should decrease a little. Which would be more than welcome. You can use the option Gamma to estimate the Delta when the underlying hits 110.50, but its not worth it in this case.

Summary:

Bought HE Apr 104 Put for 4.4250 points, when HE was 105.550.

Stop when HE is 110.50.

Target when HE is 98.325, which shades our expected target of 98.225 by .100 points for slippage.

.100 points is .1/.025 = 4 ticks in the future and .1/.0125 = 8 ticks in the option.

Risk: $851.40 from calculation above

Reward: 105.55 - 98.325 = 7.225 Points * 43% Delta = 3.10675 * $400/pt = $1,242.70

R:R = 1242.70/851.40 = 1:1.5 not a great ratio but given the uber Bearish investor environment, thanks to Russia's invasion into the Ukraine, plus the Bearish indications discussed above, I think its adequate to take the trade.

Possible Apple Drop

AAPL has reached an area where there's a confluence of possible sources of resistance on the hourly chart. Price could easily blow right through this level, come back down and retest it, then take off to the upside. But there are so many independent sources of resistance, you got to make some attempt to trade it.

Because AAPL could ignore the resistance levels or react to news over the weekend (today is Friday), we want to just tip toe in with a small position, just in case we get a nice gap down with continuation on Monday. If price makes a nice sustained move in our favor then we can scale in for a bigger position.

The top chart above is the 60 minute chart, where we see the confluence of resistance. The next chart is a blow up of the 60 minute chart showing the area around the closing price. You can see the 2 Fibonacci retracements, the Trend Line, the D point of the AB=CD, and the 50sma just under the closing price.

Here are the different sources of potential resistance:

• Trend Line Resistance
• 61.8% Resistance green range
• 38.2% Resistance yellow range
• AB=CD D point Resistance
• Extreme overbought Stochastics
• Possible 50sma Resistance
• Possible Resistance from previous support
• Possible attraction to an unfilled gap

Very close to today's close, we got a June 125 Put for $2.87. The stock was 127.62 at the time.

The Target is where the -27.2% green Fibonacci Extension level meets the lower Trend Line at about 119.79.

Max risk is the cost of the option, $287. The option had a Delta of 40% and a Gamma of .04. So the Delta at the target would be approximately .40 + .04 * (127.62 - 119.79) = .71. For purposes of estimating the option value at the target, not considering the Theta loss, we'll just use the average Delta from entry to the target, which would be (40% + 71%) / 2 = 56%.

Using the average Delta, the reward at the target would be .56 * (127.62 - 119.79) * 100 shares = $438.

Now we can calculate the Reward:Risk ratio: 438/287 = 1.5:1, not great but acceptable.

PEG Looks Bullish

I ran a scan on Finviz.com and found this bullish looking chart on the PEG stock Daily chart. Here's what I saw:

• Flag Breakout
• Positive Stochastics Diversion 
• See angled yellow support line segments under Price and Stochastics
• Bounced off 61.8% Fibonacci
• See light blue Fib line
• Close over and retest 50sma
• Bollinger Bands/Keltner Channel Breakout
• Possible AB/CD
• See thick angled duplicated white line segments
• Not closing below 8ema past 8 days
• Above all Moving Averages
• Morning Star candle pattern

A negative in this setup is the overbought Stochastics. However, look at the Stochastics between 9/28/20 - 10/27/20. Notice they are pegged (no pun intended) in the overbought area while price continued upward from 50.32 - 61.89. Why can't that happen again?

It would be safer to wait until we've closed over the previous high swing point at 62.15, but given all the bullish indications and the overall bullish stock market, I don't think its very imprudent to enter early.

So, at 3:14pm ET, after giving today's candle a chance to do what its going to do, I got a June 60 Call for $2.70. The cost nor the Theta decay warranted a spread, in my opinion, so I just got a simple Call.

Set the Stop just under the low of 2 candles before the current candle. The low of the 2nd candle back is 57.32. I set the Stop to 57.30.

There are many ways to trail a Stop. I like trailing the low of 2 candles back. Candles violate the low of the adjacent previous candle, and then continue with the trend, much more frequently than the low of 2 candles back. We're not actually going to trail this Stop for some time, if ever, but trailing Stops is where I got the idea to place the Stop for this trade.

A more typical and "proper" Stop would be under the swing low of 54.96, like maybe 54.90. But since the Stochastics are overbought, I wanted to use a tighter Stop.

Considering a Target, notice the AB/CD terminates over the 27.2% Fib extension but before the 61.8% Fib extension. Because of this, and the high Stochastics, I want to set a conservative Target. So I set it to 65.36, just before the actual 27.2% Fib of 65.38. I like to shade actual targets a little to account for slippage, Bid/Ask Spreads, and outright near misses. Two cents isn't really enough but the AB/CD suggests price will exceed the 27.2% Fib by a generous margin.

Entry equivalent 58.85

Stop 57.30
Target 65.36

Entered with Jun 60 Call 2.70

Delta .463, Gamma .048

If we hit the Target at 65.36 then price will cover 65.36-58.85=6.51

Gamma indicates we should add .048*6.57=0.31248 to our initial Delta of .463, or 0.77548, or .775 with rounding.

If we average these to get a rough effective Delta, (.463+.775)/2= .619

So, our reward is approximately 6.57 profit * .619 Delta * 100 shares = $406.68

Our risk is the cost of the option, 2.70 * 100 = $270

So, Reward:Risk = 406.68/270 = 1.5:1, not great but acceptable.