New Beginnings
Bonjour la France!
I have taken a break from writing for the past 8 weeks. For good reason - After 10 years in Southeast Asia (2 in Singapore and 8 in Malaysia), my family and I moved back to the Paris region. We have moved continents several times. This was our sixth time moving countries. But it was the hardest as we did not have a company backing our move; we did everything ourselves.
In between lending a hand to my wife in organising the sale of 1/2 of our furnishings (We went from a 6000 square foot condo to a 250 year old 900 square foot house!), supervising the loading boxes in a 20 foot container, jetlag, renovating the “new” house, unpacking boxes, etc… I have not been doing a lot of trading, outside of GG (separate Substack), I have been gathering my thoughts on my 18 year ++ trading career, most of which has been with equity options, the last 3 of which has included FOREX.
This post is the first of a series on doing two things:
1) Planning - this includes both portfolio and individual trade planning
2) Principles of discipline - As Joseph F., a good friend and trading partner up in Northern Norway states very well “Staying away from yourself and sticking to the plan” is important.
Going forward, each weekly post (published before market open on Monday’s) will have an extensive free section with a step by step formula for planning that readers can apply to their own style and what I hope is good general info on the state of the market. Premium subscribers will be provided a summary of the specific opportunities I am watching for the coming week.
Part 1 - Portfolio Planning
Every weekend, I look at the daily charts of the S&P (SPY) and its components and assign a market sentiment rating to each of its major components defined by are unique Exchange Traded Funds (ETFs) that divide the S&P 500 into eleven index funds.
My rating system for both SPY and each of the Sector SPDR’s is based on a point system from -3 to + 3. There are many factors that play into my rating system, including but not limited to one year and three month regression channels, position of price vs. a baseline and several moving averages, as well as supporting indicators. SPY, while currently in a longer term uptrend, is currently at a 0 as it is also in a shorter term downtrend.
I currently have the following rating for each of the Sector SPDR’s:
XLB -1 (low base with lower range at 50% fib pullback and 50 sMA above)
XLC -1
XLE +1
XLF -1 (low base but rangebound between previous resistance on low side and 50 sMA on high side)
XLI -1 (low base with lower range at 38.2% fib pullback and 50 sMA above)
XLK -1
XLP -2 (broke previous pivot low and moving to a potential low base)
XLRE -2 (potential bear rally formation)
XLU -3 (low base after breaking major support level)
XLV 0 (price bounce on 50 sMA in lower section of ascending triangle)
XLY -1 (potential bear rally formation but longer term ascending trendline support)
Overall, the market is currently “dull” and but leaning bearish for the next week with an average market Sector SPDR sentiment of -1.18. The next week is the last week of summer holidays and historically a flat week.
Generally speaking, I am looking for sideways to bearish opportunities for the next week but prefer to balance with sideways to long opportunities from a delta perspective. Although, it may be better to just wait until next week. What does this mean?
I like to scan each of the components of the Sector SPDR’s for opportunities corresponding to my scoring system. I am only interested in setting full on long or bearish strategies in a sector if the score is -2/+2 or -3/+3. Therefore, directional candidates will be inside of XLP, XLRE, and XLU. All other sectors would have non-directional or non-directional with a lean towards its sentiment score.
XLU is the most bearish. So I have looked at all 30 of its components for bearish plays for the next two to three weeks. Take a look at SRE, SO, and PPL - they have intriguing charts.
There are intriguing charts for components of each of the sector SPDR’s based on my market sentiment. For a majority, I am only looking at sideways plays (butterflies, calendars, and iron condors) for scores between -1 and +1. I am looking at mildly bearish or bullish plays (diagonals or credit spreads) for -2 or +2 scores and standard directional plays (straight calls/puts, debit spreads, and directional butterflies).
Below are a few potential plays I am considering for the next week, IF I decide to trade. But as mentioned, it may be better to just wait until after the US Labor Day holiday.
My favorite candidate is actually from the above charts. I am interested in a directional butterfly with a bearish lean on SO.
I will position size with 5 contracts $500 and set an order to sell 3 contracts at a double. I will take a loss on 2 closes above or below the break even levels (<$65.93 or >$69.07).
My second favorite opportunity balances the bearish slant of SO with some positive delta’s on EMR. As I plan on five contracts of the SO put butterfly, my total delta’s will be approximately -100. I am looking for a trade with +100 delta’s.
I would like to buy five broken wing butterfly’s on EMR as per above. I do expect EMR to reach $100, but my prognosis is that it will hang out there, where I will make max profit. If it keeps going up, so be it - I’ll still make profit. I will take a loss with two closes below $94. If it doesn’t make it past $96 by September 7th, I’ll also take a loss. As long as it is above $96, I’ll hold until expiry.
Please do your own due diligence!