Sunday Setups - 10/6
Happy Sunday,
To make your Monday more enjoyable, we’ve prepared some Fresh Trade Ideas for you. They go nicely with a freshly squeezed glass of lemonade!
What is the Sunday Setup?
It’s a short review of trades from last week and a detailed overview of trade ideas for this week. Build your trading strategy for the week in the time it takes to finish a glass of lemonade.
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Alright, is that sugar kicking in? Let’s find some edge!
Market Review
Before we dive in to the individual trades that I am looking to take, I want to do a quick review of where the markets stand. Understanding the overall market trend will help guide us with how we approach these trades.
The /ES was basically flat this week, yet it had some head fakes each direction.
Lots of headlines this week related to the air strikes from Israel and the US dockworkers strike. It can be pretty easy to overreact and make poor trading decisions based on these emotions.
At the end of the day, headlines don’t really matter all that much when it comes to trading. We need to follow price and volume.
We started the week with a bit of a selloff, which was quickly regained at the close Monday. Tuesday morning brought more weakness, and we basically chopped around $5750 until Non-Farm Payrolls Friday morning. Indices spiked, sold off, and spiked again.
Quite the drama to close up a whopping 10 pts in the /ES on the week!
It did give us some great entries, which I’ll cover later.
The market structure is still bullish - the 8 EMA is above the 21 EMA, which is above the 34 EMA.
There has been a lot of consolidation around $5800 in the futures product, trading around this level for the past several weeks. I think the sell-off this week nearly to the 21 EMA might be enough to push this higher. My first target is $5850 (127.2% extension from this week’s swing high to low), and beyond that $5900 has a confluence of several extensions.
Let’s take a look at the cash index - SPX.
There are a bunch of extensions right at $5800 (also a big round psychological number), which would make this an obvious overhead target. This is 50 pts higher, which would align with that first target I mentioned in the /ES at $5850.
Now, I think the probability of the SPX hitting $5800 is relatively high.
Why?
If we look back over the last month, the index has barely even tested the 8 EMA. Price consolidated, and the 21 EMA has basically risen to catch up with price. This is a strong bullish trend.
The pullback we got this week might be enough to bring more buyers into the market and push prices higher.
So, do we just blindly go long?
Let’s look to see if there are any red flags pointing to a potential pause in the upward trend.
First, the VIX had an interesting trend this week. While the indices finished the week green, the VIX closed the week +2.25 or +13%.
It has had a clear trend of higher lows this week.
What does this mean? Well, for one, implied volatility on SPX options has increased. It does not necessarily mean that the market is headed for a selloff.
This could be impacted partially from the geopolitical headlines this week, causing some uncertainty. It may be a sign that the market is reaching an “exhaustion point”, meaning that the current uptrend is getting extended and may be due for a pullback.
Though, it is an indication that there might be more demand for downside insurance. So, while I don’t think it means we are heading for an immediate selloff, it tells me that we need to be conservative with entries and exits. There could be a selloff in the near future IF this trend continues. So, I will continue to watch it this week.
Next, let’s take a look at the Put/Call Ratio.
The 10 day simple moving average (purple line in chart) continues to drift lower, now at 0.67. When it reaches these levels, the chance for a sell-off increases.
Now, there are examples where this has gone lower, and the /ES has continued higher. So, take this with a grain of salt - this is not a “sell everything” flag. BUT, it does mean to warrant caution at these levels. The chance of a pullback is increasing.
Last time it was here (8/26), we chopped around for a week, and then sold off. Prior to that, in July, we rose for two weeks, and then sold off. In May, we sold off a few days later.
So, not the time to put your whole portfolio long - particularly in the indices. This aligns with last week’s trend in the VIX.
NET - the indices continue to follow their bullish trend, but given the red flags in the VIX and put/call ratio, we need to be prepared for a pullback over the next month.
I think it makes sense that the SPX goes higher, hits the upside target of $5800, and then we see some selling. That is my current bias.
What changes it?
If the SPX closes below last week’s low ($5675) on a daily basis, I will lean short and trim long positions that could be impacted.
So, given the mixed signals, how does that impact my trading?
Again, not everything is going to follow the indices exactly. So, we need to pick names that have a strong setup, strong trend, and clear indicators.
- Most importantly - limit your position size when taking trades. If everything were pointing bullish, then we could increase size. But, this is critical for limiting risk. If your normal lot size is 10, consider 5.
- Don’t chase momentum names and buy anything extended.
- I should stay away from shorter time frame setups, like 30 minute, 1 hr charts. I should zoom out, and build out entries around the Exponential Moving Averages on the Daily or Weekly charts. This puts risk/reward in my favor.
- Net - be patient (as hard as it is)!
Again, we have that pesky seasonality stat of October being down historically in election years. So, maybe we start the month strong and finish weak? Data from the Stock Traders Almanac below.
At the end of the day, the SPX is still trying to break out from the chop it has seen the past few weeks. A daily close above $5770 should confirm short term upside in the SPX.
Alright, here is what I’m trading this week.
This week’s Trade Ideas
1.) CTAS Long
Reasoning:
- Bullish Trend (8 EMA > 21 EMA > 34 EMA) on the daily and weekly charts - trading with the trend
- Squeeze on the Daily chart, which increase the probability for a bigger move over the next few weeks.
- This has been trending nicely - no huge moves either way, just clear reversion to the mean and continuation of it’s bullish trend.
My Levels:
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