Q: Why’d You Make The Switch?
Today I wanted to answer a question I got on my e-letter last week about bank earnings. One of our Options Gold members, Vol, wrote, “Last week you wrote about being bullish banks after bank earnings were positive. I believe the week before, you were bearish banks. Am I missing something?”
To answer your question, you’re correct.
I was bearish, and now I’m bullish. Let’s talk about when and why that shift occurred…
1) The Switch Happened — Over the course of the last year, XLF, the Sector SPDR financial sector has been in a downtrend. This downtrend has been respecting resistance in a way that a downtrend does! However, last week, that finally changed.
On this chart of XLF, you can see how a technical pattern would draw a bearish conclusion. This is, until that technical pattern broke, and the switch occurred.
2) The Macro Story — During earnings season, companies reporting results is typically a great catalyst to move sectors and stocks. In this instance, JPMorgan, Citigroup, and Bank of America gave investors confidence, and the buying pushed the sector higher, therefore breaking resistance.
On this chart of C, you can see how the downtrend shifted upon the earnings report.
3) Which Time Frame? — In this volatile market it’s critical to clarify your time frame, and what asset class you’re talking about. I primily trade short-term options, on a time horizon of less than 3 weeks, often times, even less. So, it’s entirely possible that I’m shorting a ticker with a 1 week time horizon but still think it’s a good long-term stock buy. In the case on XLF, it was an options swing short setup. When resistance was broken, I exited. Why? Because there was a technical and maco shift on the charts.
Check out the GS chart with the explanation as to how you can trade this with options.
This may be the part that’s the most confusing, but at the end of the day it’s all about your asset class and time frame. While I’m now considering the banks to the long side on a longer term basis, and considering adding JPM to my stock portfolio due to overall strength, I’m not going to add it directly after earnings when it gaps up and trades higher.
When Do I Do It?
I’m going to do that AFTER that news rally fades. News rallies typically always fade! So, you can short that (on a short term options basis) or you can just wait till it falls, holds support, and then you can buy the stock.
IF you don’t want to mess with any of those shorter term options trades or trades on the ETFs, you can just buy the stock after the rally runs out of steam, or buy the ETF. Personally, I like trading options so I do a mix of the above.
Check out a more in-depth explanation in this week’s episode of Dear Simpler, a special segment within Foundation, below:
I’m trading everyday — didn’t know if you knew that… but that’s how I make not only MY living, but how I help thousands of loved community here at Simpler strive to do the same. (Stay tuned for a special invitation to join us… I’m working on something that I hope you ALL will love.)
Where Should You Focus?
Look at key sectors and stocks within those sectors for the following information –
- Learn to recognize shifts accordingly
- Decide on time frames, and which you’ll trade while keeping the others in mind
- Choose strategy accordingly
The base of all of this is recognizing shifts and knowing what they mean for the overall market. The banking sector trading higher is positive for the S&P overall, and gives more fuel to the fire that the S&P can trade higher from here with key sectors behind it.
P.S. I love hearing from our traders… and here at Simpler we love teaching you as MUCH as we can. Do you have a question — write us? Do you have something to share? — reach out. We hope to feature our community in this letter regularly (maybe you’ll even be featured yourself).