A Friday Pin?
Normally I prefer directional trades, but this week is really the first closer to range bound week we’ve seen in quite some time — with a key battle going on at $2800 in the S&P. Call buyers have loaded up, which to me is a good reason for the stagnation at this price point.
Who is left to buy?
Well, the macro case is interesting because earnings is underway and companies continue to report less than what was expected, in addition to cutting guidance… yet the market holds up.
To some extent, we knew data would be bad: unemployment data, housing, earnings, infections. So it’s not too much of a shock to investors. On the other hand, I think everyone is just hoping this is all going to be over soon. The market seems to be trading on the hope that it will be.
On Friday, I discussed this live on Trader.TV with Brendan Wickens — which you can watch HERE.
But, it’s not just about the macro condition. The last week of April is going to be a big week for earnings.
April Tech Earnings
The way the market has consolidated this week suggests to me that too many traders are long, and also that the market’s waiting on a key catalyst — one that’ll likely come in the form of FAANG earnings.
Many of the companies that report next week are companies that have the best shots of making it through COVID-19 without being too scathed.
Why? Apple (AAPL) and Microsoft (MSFT) are sitting on huge cash reserves, with MSFT’s cloud based business still growing and Microsoft Teams and Skype thriving unprecedentedly. Amazon (AMZN) of course has so much demand, they’ve had to hire another 175k workers. For the first time they aren’t making deliveries within their prime window. Facebook (FB) and Google (GOOGL) — I imagine both are being used heavily to keep in touch and keep boredom at bay. Netflix (NFLX), as we know, has had extreme demand.
I also like to group Tesla (TSLA) in there, as TSLA (in my honest opinion) is a brand of the future, and it’ll continue to see speculation therefore driving up prices. New car sales are down 25%, yet TSLA so far still seems to be thriving, the unique car brand that’s still making it work. Of course, Elon Musk has been in the news quite a bit… which doesn’t hurt.
With these companies (of course minus NFLX that already reported) coming up next week, I’m bullish on each which gives the market a slight bullish edge, though I view it as range bound. Next week, I believe it’ll be incredibly volatile, but until then I’m targeting higher prices in these names.
While Waiting on Earnings…
So, what did I do this week? Well, at the beginning part of the week, I was focused on momentum trading, until we got into Thursday. By Thursday, you could see the consolidation on the indexes along with key stocks — right before expiration.
That typically means it’s a good time to look for a pin.
What’s a Pin?
A pin is when a stock closes at or around a key psychological value, that tends to be a strike price with high volume and high open interest. I like to trade these with butterflies, unbalanced flies, and iron condors.
Let’s look at Microsoft (MSFT) to dive in deeper on the topic.
This is an example of how I set up neutral trades overnight, from Thursday going into Friday, for theta decay during range bound markets. While I have an overhead target of $185 on MSFT, at least overnight for options expiration it looked like it would continue chopping in a range.
And, it’s not just Microsoft, consolidating in a range overnight with theta simply decaying.
Check out this grid below (with these key stocks trading near their pinning strikes):
- AAPL: $280
- NFLX: $420
- TSLA: $700
- AMZN: $2400
- MSFT: $172.50
- FB: $185
- WMT: $130
I set the following trades in my Mastery program, during our Thursday live trading session. We traded TSLA, AMZN, MSFT, AAPL and AXP, taking a loss in AMZN but wins in the rest of them.
What about Momentum?
As for momentum, Thursday and Friday were definitely not our days for momentum.
But the great thing about consolidation is that it’ll almost always resolve itself with a momentum breakout. Consolidation moments are key moments to look for setups to trade, on the breakout!
While I prefer to trade momentum, sometimes the market just doesn’t give it to us. When it doesn’t, looking at moments in time where we can benefit from consolidation works as well. These tickers largely remained range bound for two days, giving us a good opportunity to sell some premium.
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