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.

Citi Group Gartley Pattern - Update 5

We gapped up at the Open, filled in the gap and tested the 3ema. Then we reversed upward and closed over the previous Close. And we made a higher high and higher low compared to the previous trading day.

Even though we have a red candle body today, it was clearly a Bullish day. Definitely wanted to hold the position.

However, the Earnings Report (ER) is in 4 days. Our options should have increasing Implied Volatility (IV) due to the approaching event as well as the overall market dynamic activity. Option Gamma should also be increasing. These are Bullish for option pricing. But Theta time decay is also increasing, Stochastics are very overbought, and traders may want to sell ahead of the ER to capture their recent profits. These are Bearish.

So, while I seldom use Stop Losses on options, today I added a Stop Loss at break even on our position.

Citi Group Gartley Pattern

Both charts above are Daily charts. The top chart is widened out to see the Gartley pattern. My own research has proven to me the Gartley pattern has a fantastic success rate of approximately 75%. I define success as hitting the .618AD level before breaking the X point level.

The bottom chart is zoomed in to see the Doji Gap Up candlestick pattern made by today's candle and the previous candle. This formed on high volume. This is a very Bullish indication.

On the zoomed in chart, it also looks like we're forming a Fry Pan Bottom candlestick pattern. If we break out of that to the upside, that would be a very Bullish indication.

So, based on the above, I got a Jan 60 Call for $3.40. I know that Theta time decay is relatively high given that there's only 3 weeks left until expiration. To deal with that, I plan to turn this position into a Call Spread after a sufficient increase in the stock price. If I can sell a 72 strike Call option for $3.40 then I'll have a risk free trade.

The good thing about being close to expiration is that Gamma is also high. So if the stock price rises, the option value will rise quickly.

The Quarterly Earnings Report is due out Jan 14th at 8am ET. I plan to close this position before then. If the target isn't hit by the ER, then I'll sell the option on the afternoon of the 13th, which should enjoy a boost in Implied Volatility.

Since we have defined risk, thanks to using options, I'm not very concerned about a Stop. If I had the stock, I'd put the Stop just under the D point of the Gartley, or if I could afford the potential loss, a better spot would be just under the X point of the Gartley.

For the Target, I'm using the .618AD Fibonacci retracement level, which is 71.62.

Expecting WMT Bullish Reversal - Update 3

Normally I include targets in my posts but I haven't yet on this one. I'm really not sure yet but I do see some possible targets. Here they are in ascending order:

• 145.11) 38.2% Fib of the yellow range.
• 146.43) 50% Fib of the yellow range.
• 147.74) 61.8% Fib of the yellow range.
• 149.61) 78.6% Fib of the yellow range.
• 151.90) Trend line.
• 155.03) 127.2% Fib of the yellow range.
• 156.71) 127.2% Fib of the green range.
• 158.16) AB=CD 140.86+(152.00-134.70)
• 158.88) 161.8% Fib of the yellow range.
• 162.69) 161.8% Fib of the green range.

Of course, none of these are guaranteed. We could start tanking on Monday. But if I hazard a guess now, I'd say the confluence of the AB=CD at 158.16 and the 161.8% Fib at 158.88 looks good.

In addition to the confluence, if price is making a swing low here, then we're reversing in the middle of the channel we're in rather than the bottom of the channel. That would be Bullish.

Also, Stochastics are still oversold. So we have a long runway to the upside based on that. And, it has a slight upward slope over the past couple days. In fact, you'll notice while the Stochastics are sloping upward the past couple days, the candle lows are sloped downwards. That's a Positive Stochastics Divergence, which is very Bullish.

And on a fundamental basis, which I try to ignore, Walmart's quarterly Earnings Report on 11/16/21 was considered very good and analysts were surprised the stock went down. I'd guess it was a Wall Street manipulation to fill the gap. Also, I think the strong inflation we obviously have will increase traffic to Walmart for quite some time. If these fundamental reasons are true, they'll provide a tailwind to Walmart's stock.

But, I'm not confident at all about a target at this point, just an opinion we're heading higher based on technical analysis. This being the case, I picked a price range for a Vertical Call Spread that I thought would be within the up leg I think we're starting, and had an expiration date that gives us enough time for the price action to reach its swing high, far enough in the future to limit the Theta time decay, yet not so far as to limit the Gamma. As you know from the original post in this thread, I picked the December 145/150 for about $1.00 each.

Soon as I bought the options, I entered an order to sell them at $4.95, which represents the maximum valuation of the spread other than holding to expiration. 

So, the bottom line is we don't need an exact target on this particular trade, at least the way I'm trading it. We just need WMT to rise high enough over 150 such that the option spread reaches a valuation of $4.95.

July Corn Rising - Update 12

Wow, interesting day! The FOMC Meeting press conference yesterday included some discussion on tightening their monetary policy in maybe 2023 (it's currently 6/17/2021; ya gotta be kidding me), and look what happened today. Risk off in most assets. The Federal Reserve is in a roach motel, in a box, that's painted in the corner, inside the Hotel California. In other words, they're stuck with either extreme easy monetary policy, or crashing the markets.

Regarding our Corn trade, first thing to say is our Stop was hit on Wheat. So we're out of July Wheat. For more details, see:

https://jmstweets.blogspot.com/2021/06/wheat-might-make-some-bread-exit.html

After Wheat got whacked for $-552.50, I had to decide whether to also exit Corn and/or the hedge. Corn ended the day at $-576 and the ZW July 660 Put hedge ended the day at $+698. While the hedge more than covered the incremental loss from yesterday, it hardly covers the combined loss of Wheat and Corn, which is about $1,100. So, what to do?

Well, we need to decide whether Corn is going up or down from here, and since the hedge is actually on Wheat, we need to decide on where Wheat is going from here also.

If you go to the link above and see the Wheat chart, you'll see it broke out of the downward Flag channel its been in for about 12 days. It broke to the downside, which was unexpected. It made a slight new swing low. The previous low was 639 1/2 and today's low was 637 1/4. Does this suggest further downside or a double bottom?

I see a possibility for both. Notice the 200sma exactly coincides with the 78.6% Fib of the green range at about 630. Notice also that Stochastics are just about to go oversold. It seems likely that when the market opens up, price can go further down, or gap down, to this 630 level, then reverse and head back up. If this is a Double Bottom pattern, then we're headed much higher.

Another way to look at this is that we've formed a "lower case 'h' " pattern on the Daily chart, after forming a Double Top. This is going back to about April 27th. If this is the "Dreaded 'h'" pattern, or it also qualifies as an "Inverse J-Hook" pattern, then we're going much further down.

So, which is it? There's no way to know before the market closes on us today.

I'll tell you my thinking, but first you need to understand what option Delta means. The Delta value of an option tells you how much the option price will move as a function of a move in the underlying security. Delta is the percentage of the underlying that the option price will move . For example, when we bought the July Wheat 660 Put, the Delta was .514, which I documented in the post that day. That means for each point that the Wheat Futures contract moved downward, the option price would increase by .514 points.

You also need to know that the Delta value is not constant. As the underlying causes the option to move more in the money, the higher the Delta becomes, up to a maximum of 1.0. And the opposite is true. As the underlying price action causes the option to move more out of the money, the lower the Delta becomes, down to a minimum of zero. The amount the Delta value moves relative to the amount the underlying moves is called Gamma, but we can skip that for now.

I bring up Delta because if Wheat goes down further then Delta will increase. In fact, its already increased substantially because the underlying Wheat Futures has dropped considerably since we got the option. Today the option's Delta was .71 at the market Close, up from .514 when we got the option. So now the hedge is increasing by about 70% of the move in the futures rather than about 50%. This is an important consideration in the decision of how to handle the situation we find ourselves in.

Keep in mind that Wheat and Corn have been moving very similarly since this trade began. I expect this to continue for the duration of the trade. So, if Corn reverses and heads back up, I'd expect Wheat to go up as well.

OK, let's look at the Corn chart above. I see a reason to bounce and a reason to continue downward.

See the 2 thin white horizontal lines? We closed right at the same level today. Those lines represent support/resistance levels from late April and mid-May. Look on your 4 hour chart to see them better. We may bounce off these and head back up. Just under those lines, there's a possible Trend Line, the 50% Fibonacci level, the bottom Bollinger Band, and the bottom of the Keltner Channel. These could also provide support. Also, very often when there's a big move on a given day, the next day sees a retracement.

On the other hand, we've made a lower swing high on 6/10/21 vs 5/7/21. That's Bearish. We've been below the 8ema for 4 days. During those 4 days, we've formed a Bearish Engulfing pattern twice. And the Bollinger Bands have been inside the Keltner Channel. Just a little inside, but if those Bollinger Bands flare apart then we may have a release of a BB/KC Squeeze, which would mean Wheat will go down much further. And, Stochastics are still in the mid-range, giving the downside lots of runway.

Bottom line, which way do we think Wheat and Corn will break tomorrow, up or down? Bottom line, we don't know.

Here's my thinking. If we get a bounce, and price heads higher, we'll hold our position until the hedge profit goes to zero, then sell it. We'll break even on the hedge. By the time that happens, the Corn futures contract will have recovered much of its value. The loss at that point will be much more tolerable, and maybe we'll have an indication whether Corn will continue higher or not.

If price heads lower, then the value of the hedge will increase faster than the loss in the Corn Futures contract. Why? Because remember the option is on the ZW $50/pt contract while the YC Corn Futures is $10/pt. The option Delta will be at least 75% and .75 x $50/pt = $37.50/pt for each $10/pt move in Corn. In fact, if Corn and Wheat fall far enough, the hedge should recover all the loss in both the Wheat and the Corn Futures.

Given our current position, if price goes up, we reduce our loss. If price plummets, we could eliminate our loss completely. So, my final decision was to hold both the Corn Futures and the hedge. 

If you are asking why not sell the Corn now, its because it may go up from here. If I thought Corn would just go flat from here until expiration then I'd sell both the Futures and the Option. But I think sideways price action until expiration, while possible, is unlikely.

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.

DBX AB/CD - Update 8

The top image is from earningswhisper.com showing DBX expectation was $.24 EPS with an actual of $.28 EPS. .04/.24=17% beat. $.04 seems mild but it should allow our Bullish setup to continue, unless management says something bearish.

The top chart in the middle is a 1 minute chart showing the reaction to the ER release. The bottom chart is a wider view of the whole setup.

At about 15:45, before the ER release, I decided to sell the Apr 25 Call for $2.47 and buy a Feb 26th 25 Call for $1.26. This cut my risk in half, and if we got a positive report (which we now know we did), then the much higher Gamma will give us more profit if the move is big enough such that the higher Gamma will overcome the higher Theta.

Doing this resulted in a small loss on the April option:

2.47-2.96=-$49.

Keeping the target the same at $29. 

Now that we know the ER turned out well, I may buy a longer dated option when we sell the Feb 26th option, if we haven't hit the target yet and the risk/reward makes sense.

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.