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'Short Term Retracement' Was an Understatement

'Short Term Retracement' Was an Understatement Here's what I said last weekend:

In the meantime the markets are exhibiting a short term retracement on the 1-month trend while the 2-month trend still holds for now. Also, perhaps surprisingly, is how the broader index, the Russell 2000, is holding up quite robustly.

Well that counts as the understatement of the year!

The potential consequences of Coronavirus was already well known in terms of the impact it could have on supply chains and the knock on effects of that.

My genuine surprise was how robust the markets had been up to that point, with only that "short term retracement" belying a clue of some bearishness at that point in time.

The good news is that the "retracement" - as it was right then - was enough to stop out of most profitable positions in an orderly fashion. This is the beauty of our trading plan, and the carnage that followed had minimal or even zero impact.

But now we are in a different market, what is our strategy, and what is likely to happen from here?

For our bread-and-butter trading, our strategy will be to observe and be patient for the right setups to reappear. These will be based on breakouts from consolidations that are forming as flags or pullback reversals.

Right now I am confident of a significant pullback to the upside as soon as the Coronavirus is perceived to have turned the corner, either due to slowing of its momentum, or due to a vaccine being imminent.

For 2020 there is a US presidential election to be had, and provided the Coronvirus does stabilize, I would expect the market to stabilize and recover somewhat.

There will be plenty of great opportunities for us, so no worries because these swings will be enough for us to achieve regular P1s.

Beyond the US election then that gets interesting, and I'll comment on that at a later date, but in the meantime it's a case of my favourite trading expression: "Trade What You See".

Be patient for consolidations to form alongside corroborating OVI readings, and make sure you do take profits early.

There are other ways to profit from this kind of market where big swings are likely. One of those ways is the straddle.

The straddle is where you expect a big move, and you don't care which direction so you play both sides at the same time.

You do this by buying calls and puts at the same time in a particular way to ensure maximum value and minimum risk. If the stock price moves by enough (in either direction) you will win.

Option premiums are priced in such a way that they become more expensive in a high volatility environment, and vice versa.

So the trick is to trade these straddles when things have calmed down while still in anticipation of further big moves.

When might this be particularly interesting?

NEXT EARNINGS SEASON!

Yes, by July I would expect things to have calmed down enough for option premiums to be better value, but I would also expect some wild price swings (expected and unexpected) that will be a direct result of the current drama.
I had a few of these in the recent earnings which I'll show you today, and there are some interesting ones setting up right now too.

Next earnings season will see an unusually high number of these, so right now is an ideal time to start preparing!

It's all in today's OVI Market Review.

Bye for now.

OVI,Guy Cohen,FlagTrader,OptionEasy,Straddles,

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