Sunday Setups - 9/1

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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.

Alright, is that sugar kicking in?  Let’s find some edge!

Quick Summary

• Market Review
• This week's Trade Ideas
• Open Trades Review

Happy Labor Day everyone - I hope you’re having a wonderful long weekend!

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.

Last week, I mentioned that we might get a bit of consolidation or selling down to the 21 EMA before heading higher.

What does that look like?  Well, we could have some consolidation or back-and-forth around $5500-$5600 before moving on to new higher levels.  Maybe get a head fake sell-off down to the daily 21 EMA, where buyers might step in and take the indices higher.

8/25 FTI Newsletter

So far, that assumption has played out.  

NVDA earnings came and went, and who won?  Market makers….selling premium!  Implied volatility was high leading into this event - NVDA options were pricing in a move of nearly 10% up or down, and that implied volatility got wiped out the day after earnings.  Just a quick reminder that buying OTM options into earnings is a losing strategy.

While initially, it looked like NVDA might fall apart, it held the 34 EMA.  It didn’t explode higher, and it didn’t fall apart.  Like they say, buy the rumor, sell the news.

Now the million dollar question - do we keep heading higher, similar to each pullback we have seen over the last year?  Or, do we break last week’s low of $5,561 and head lower?

Well, let’s look at our indicators and the rest of the market to determine our bias and ensure that we are trading with probability in our favor.

As I mentioned last week, it is hard to make the case for bears in this market, as there are several factors in favor of the bulls.

First, let’s look at market structure & trend.

Take a look at these charts of the /ES (S&P Futures):

The exponential moving averages are stacked positively, and the 8 EMA has crossed above the 21 and 34 EMAs - buy signal.

The blue line is the 8 period exponential moving average.  The red line is the 21 period exponential moving average, and the green line is the 34 period exponential moving average.  These studies help to visualize the trend of the underlying asset.

When the shorter-term EMAs are below the longer-term EMAs, the trend is down, and the opposite is true as well - positively stacked EMAs (8 > 21 > 34), would indicate a bullish trend.  (more details in last week’s newsletter)

We trade with the trend, as you can be imperfect with entries and exits & still trade profitably.  You put probability in your favor & can structure trades with low risk and potentially high reward.  Trading against the trend requires more exact timing and there are fewer opportunities with low risk high reward profiles.

Additionally, the longer time frame chart (weekly) of the /ES has not changed structure throughout all of this.  The 8 EMA has remained higher than the 21 EMA, which has remained higher than the 34 EMA.  So, these sell-offs have just been healthy reversions to the mean (21 EMA), in a bull market.

It’s when the EMAs cross negatively on the weekly chart that could mean a more prolonged bear market.

Net - market structure is bullish in the S&P Futures (positively stacked EMAs with higher highs and higher lows in price movement).  Is that the case in the /NQ?

Looking at the /NQ, it has been the weaker of the two indices - only retracing 61.8% of the prior downswing (7/8 - 8/5), whereas the /ES is beyond the 78.6% retracement and is just about 65 pts off all time highs.

This is what I would call a yellow flag.  Let’s dig a little deeper and look at the “Magnificent 7” stocks (AAPL, MSFT, NVDA, GOOGL, TSLA, AMZN, META).  These make up ~42% of the Nasdaq and ~31% of the S&P.

• AAPL: good bullish structure on Daily & Weekly
• MSFT: bearish structure on Daily, and shifting from bullish to bearish on Weekly timeframe.
• NVDA: good bullish structure on Daily & Weekly
• AMZN: bearish potentialy shifting to bullish on Daily, and bullish on Weekly
• META: good bullish structure on Daily & Weekly (also has a weekly squeeze, looking like it might be setting up for a larger move higher)
• GOOGL: bearish structure on Daily, and potentially shifting from bullish to bearish on Weekly timeframe.
• TSLA: bearish potentialy shifting to bullish on Daily, and bullish on Weekly

Net - 3 of the 7 have clear bullish structure, while the other 4 have somewhat mixed signals.  So, not a clear signal for the bulls - need to remain cautious and conservative in this market.

Second, let’s look at the put/call ratio.  Extreme readings can give us an indication of a change in immediate-term trend.

The 10 day moving average of the Put/Call ratio (purple line in chart), as at 0.71, which is low.  So, that could indicate a potential top in the indices.

However, we do not have a true extreme reading, relative to recent history.  You can see that the 10 day simple moving average remained below 0.7 for some time.

I’m looking more for a daily reading below 0.5 or 0.45 that would indicate a more extreme bullish call buying than we have seen in recent months.  That would be a reversal sign for me to lighten up positions and focus only on names with the strongest price action.

So, not a bearish signal quite yet, but another yellow flag, given the low reading of the 10 day SMA of the PCall.

Third, any other extreme readings across major markets that would indicate a shift in risk appetite or exposure?

The Aussie Yen is a bit of a red flag here, as it has had a fairly drastic reversal.

Why does this matter?

Well, the Australian dollar is often regarded as a "risk-on" currency due to Australia's significant reliance on commodity exports to China and its sensitivity to global economic growth. In contrast, the Yen is viewed as a "safe haven" currency that traders turn to during times of market volatility.

As a result, the AUD/JPY pair is frequently seen as a reliable gauge of risk sentiment in financial markets, rising during periods of optimism and falling when risk aversion is high.

So, looking at the chart of AUD/JPY, the daily time frame has bearish structure, which could be shifting back to bullish if we get a decent close above the 34 EMA.  However, the weekly chart is shifting bearish, as the 8 EMA has crossed below the 21 and 34 EMAs. See below:

This is coming into a critical area (~100-101), where we will get a better indication of where this trend develops.  It could come into resistance at these levels and continue lower.  This would be bearish for equities.

So, whats next?  $6,000 or fall apart?

Overall, I think we could continue higher in the near-term, but I think the strong momentum we’ve seen earlier in the year is slowing.  So, we could be nearing a top in the market or at the very least a bit more distribution over the next few months. Given the weakness in the /NQ and the big reversal in the AUD/JPY, I think caution is warranted.

Again, what’s more important to my strategy is identifying the overall trend - bullish to neutral, and gauging whether or not there is an immediate risk to the overall market. There are some significant cracks in the foundation so to speak, so will need to be patient with entries on the long side and take profits early.

Remember: strong convictions, weakly held.  The market is always changing (thank you, captain obvious), so need to adapt outlook as more information comes available.

At the end of the day, I’ll continue to focus on equities with a strong bullish structure, squeezes, and recent prices near 52 week highs or all time highs.  

This combo puts probability in our favor, and has proven successful many times over.  I’m not betting the kitchen sink on any one trade, and will remain light in terms of overall risk exposure, as there are a few yellow flags in the indices. If the market breaks last week's low, I will likely look for a short opportunity in the NDX (weaker of the two indices)

Now, in terms of the economic calendar, we have some jobs numbers Thursday and Friday.  I’m not expecting much from this, other than maybe some short term volatility in the futures, but if there is a reversal, we’ll get positioned for it.

Alright, here is what I’m trading this week.

This week’s Trade Ideas

1.)  SPOT   Long

Reasoning:

• Bullish Trend (8 EMA > 21 EMA > 34 EMA) on the daily and weekly charts - trading with the trend
• Squeeze on the daily and weekly charts, which increase the probability for a bigger move in the near future.
• Just about 13% off of life-time highs, so potential for that to be breached.

My Levels:

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