Trading off Longer Term Support | Swing Trading (Days to Weeks)

good afternoon everyone john mcnicholer and welcome to swing trading days to weeks yes looking at the chat we have had a bumpy ride in the market what we'll do today is we'll take a look at some of that market action look at some of our previous trades and talk about catching a falling knife so stick around all right hey it's great to see those you that are live with us today such as vj dylan krista we have jerry lou el diego jack john uh who else we got here it said jack there rk robert as well mr pav maloli is helping out on the chat any questions i am unable to get to he'll be more than happy to help do appreciate him helping out today thanks pat you can follow both of us on twitter our first initial last name mine's at j mcnichol underscore tda and pats should be at p-m-u-l-l a-l-y i think i got that right underscore t-d-a that's a great way to learn more about your instructors and learn about the markets as well let's go ahead and take care of the disclosures folks and we'll get into our discussion here the content is intended for educational information purposes only not investment advice or recommendation of any security strategy or account type options not suitable for all investors spread straddles other multi-leg options strategies often involve greater more complex risk than single leg option trades transaction costs are important factors should be considered when evaluated in any trade and keep in mind you're encouraged practice what you learn here today with tools such as the paper money software which is for educational purposes and successful virtual trading during one time period does not guarantee successful investment of actual funds during a later time period as market conditions change uh constantly uh make note and we'll actually look at this on our examples uh on both the uh long calls and put positions uh places the entire position at risk as that can expire worthless likewise with short options uh assignment can be occur at any time regardless of the end-to-money amount and while this webcast may discuss technical analysis other approaches include fundamental analysis may assert very different views and a stop loss order will not guarantee an execution at or near an activation price once activated they will compete with other income in market orders there's a brief bio for those if you are new to the webcast let us know we'd like to give you a hearty welcome uh on this day and you can see my background on what i enjoy teaching and some of my other endeavors there and here we go uh with the agenda you can see that we're going to go ahead and review current market conditions we'll start off looking at our open practice positions normally i say that towards the end but based off of the back and forth it's probably important to take a closer look at them now we'll define uh catch a fallen knife as we've seen markets fall down they could be coming up to an area of support some traders may look to anticipate that uh attempting to capture uh that uh knife by the handle uh otherwise we've also known that prices can continue going lower and therefore grabbing it by the blade which obviously doesn't feel too good so obviously pros and cons with that and we'll demonstrate place in a trade with a defined risk option trade now this is one area where hey if things do not necessarily go in a particular direction we do have control over risk and the best we can define that risk we'll do some examples of that today all right so let's go ahead and we'll get right into it here let's go ahead and bring up uh on the thinkorswim platform and as we look at the s p 500 you can see as an example you know overall trend is still intact we did have an attempt at a bounce not much of a follow-through there we talked about this yesterday uh in the futures class as the price struggled to kind of get in the mid part of the range of the sell-off on the future side and failed to stay much above the highs of that previous day we're still seeing kovid with the new variant market trying to price that in when there's a lot of unknowns that can bring some volatility into the market and we can see that occurring uh notice uh intraday as far as the low we still have about an hour left in the market uh price action did hold that 55-day exponential moving average and had came off of those lows so a little bit of a back and forth there and as we go back a little bit where some traders may be keeping an eye on is some of the previous highs here in the s p down around the 4450 4445 with the principle of broken resistance potentially acting as a level of new support now you can also see uh possibly some of the continued downside risk by looking at kind of more of the price channel that i have uh which would put us a bit closer uh to the 45 30 45 25 area there depending on how quickly it looks to trade around that area there in fact some areas down in if in the 44s looking at some other areas uh by contrast looking at the russell russell really getting hammered uh after making those highs uh earlier in november november uh not looking to be a good month for the small caps to say the least but even looking at the intraday kind of getting down into some of those lows particularly in the september area there and one can also see where some of that potential downside risk if that momentum continues now we can see price action coming a little bit off of those lows here today as well with a little more of that tail and as we look at the nasdaq ndx uh you can see a bit of a difference here compared to uh the s p and especially the russell uh as uh you know a lot of the uh the tech fang stocks uh have been demonstrating some relative outperformance uh whether some investors consider that more of a flight to safety uh with uh covid kind of more of the work from home you can see as far as with some of the previous lows still above that and well above in this example 55 day moving average and actually still nasdaq holding in the upper part of that channel this level kind of around the just below the 16 or 15 900 area there you know if one looks at the transition of price action price action making uh higher highs and i'm sure pat's probably discussed this in some of his advanced technical analysis you know we have seen some divergences as far as momentum momentum has slowed i had slowed to the upside we've seen lesser volume uh just uh you know not as uh as strongly bullish as we've seen in some previous runs i mean certainly the price making those highs but what's behind that uh that momentum has kind of slowed down and traders may be keeping an eye you know are we potentially seeing some lower highs to be followed by you know a breakdown that would be an example of a smaller head and shoulders if we were to see that okay a quick look at the vix on volatility and a vix still high up in the 27s they have backed off a little bit from where we were the other session but we can still see it being elevated in that 27 area there okay and uh just from a point of the macros there let's look at uh interest rates uh tnx the 10-year yield uh took a uh hit to the downside there lot of fed talk there i haven't been able to dig deeper in maybe pat has he can certainly share if he likes on the chat uh but uh the fed potentially taking a little more of a a dovish tone as far as with the concerns as far as wikovid and likewise uh with um what was my thought there uh not just on uh kovid but as far as removing the transitory language um so at least the fed conceding that inflation may be around a bit longer there when yields are still kind of in the lower range here we haven't seen that pop all right so let's go ahead and take a look at some of our existing positions i want to spend a little time on this so we had done some defined risk trades last week and we'll do some more this week i'm going to go to the monitor tab uh first we'll talk about the one that's not on here and that would be suncor su suncor was uh an energy play looking on the bounce and i'm sure if we've looked at energy prices had been taking a bit of a hit over this last week with some of the potential shutdowns but we had a a swing setup uh looking on the bounce and there was some follow through on our entry from last week uh but uh prices uh got slammed late last week going into friday and uh we had gotten stopped out of uh the suncor trade now keep in mind stops are not guaranteed to fill at a specific price so once it's triggered it will compete with other income and market orders i believe if we go to the monitor tab uh go to account statement we can go ahead and plug in su which we have and you can go ahead and look at previous trades as well as orders now fortunately uh for this example uh we were stopped out at that stop price so we didn't have a a gap that went below that so there was some liquidity there where we were stopped at the desired price 2437. and you can see prices have gone lower since then so stop basically doing its job and you know price has came back to an area of support you know what some traders may be looking for is another bounce or probably more importantly a breakout of this downward slide so we may discuss more in our breakout and reversal class tomorrow if we go to the monitor tab again uh we'll look at the sky works now skyworks was an example of a short or correction long put vertical in fact both of these examples are long put verticals and this one was a lot more profitable earlier in the session i held off just to show you for illustrative purposes uh so we'll save coop there for a moment uh but if we look at sky works uh this is an example of a a long put vertical where we bought the 170 sold the 160 so that short strike being the targeted amount there if we go ahead and look at the chart swks uh you can see the breakdown of a ryzen wedge kind of a big flag some traders may look at that and basically have traded down uh to the bottom part of the channel that i have here i think i have to go back a bit on this maybe that looks like it was the upper part of a previous price channel potentially acting as support there now if we go ahead and pull this out a little bit you know seeing is it that that price action you know is at that support we are seeing some consolidation price could potentially break lower but how much time do we have left in this trade if we go back on the monitor there's 17 days left to expiration now we had previously had scaled out a part of this position if i go to the account statement and bring up swks you know we had started off uh with two contracts we went ahead and scaled out a part of that after the initial drop and we are left with one contract so if we go back one of the tools we've utilized is set in profit targets and a lot of these debit spreads we've set targets of about 50 percent uh return on risk or 50 percent of the maximum gain whatever you choose on that notice in this example we're close to about 60 percent uh with 17 days left if i right click to close on this whoops let's try that again i want to pause there we right click create close in order uh the spread right now is about eight dollars and fifty two cents uh this is a ten dollar why so the most that this spread can be worth uh would be ten dollars so there's about a buck 50 left into that so some traders you know may look to try and capture that or since we are at a profit target one consideration is to close it out and not give up the game uh as we'll see in our nes next example so i'm going to go ahead and right click to go ahead and close this out and we'll do a confirm and send now there is a bit of a spread here so that may or may not fill right away unless it's more marketable in this example it did your results may vary with that now let's go ahead and take a look at uh coupe here and this is a good lesson in uh in a few instances here uh one as far as time there's only three days left to expiration um notice we're slightly profitable on it but this was up about 40 percent return on the risk earlier in the session so what do what does that imply if we go ahead and we look at cop tried to hold out because uh which i did and obviously uh profit was at an expense uh here is the low of the day so earlier in the session this would have been up about 40 percent as we were pretty close to that target i usually like to save these trades particularly it's on the same session uh to uh close out the trades live so you can see that but this is a good illustration on saying on how those gains can quickly be diminished when you're running out of time okay two is understanding uh width spreads uh that when those options whether one or both go into money uh potential action needs to be taken now since this is a long spread uh typically we've already bought or gone long an option that is at may even be in the money and since we are three days left we're seeing that tag saying that it is in the money now what happens is on a long option position if it's in the money and no actions taken the assumption is that one wants to exercise that option in this case putting a stock to someone else at 200 at 200 now essentially what'll happen here uh is that would end up resulting uh in a short stock position because if one doesn't have this stock to put it would basically be turning into a short stock position now if one intended to do that they can allow that to happen but since we got three days left action would typically need to be taken so we're going to go ahead and basically close out that position ideally would have been nice if we did it earlier in the session and captured most of that gain but in this case we're closing out the position a little more of a break even and thereby uh removing although it didn't fill yet i have to go back and check on that is removing the risk of being exercised while it's in the money now if the price was to go all the way down and trade through the 190 and go deeper into money both of these would be in the money and they would offset each other the 200 would be the 200 would be exercised and the 190 uh would be assigned okay so let me go back and make sure i can go ahead and close that out again you can kind of see a bit of a spread here i'm just going to come in a little bit in between just so i don't forget about it later and there we go all right okay wanted to go ahead and get that up front there since we did have a lot of market action there uh now let's look at some examples of talking about catching a fallen knife now you know this is a a term that's been had has been discussed a few times uh kind of the analogy is uh as a knife has fallen or as we look at prices falling the thinking there is if you go ahead and try and capture that knife one or two things are going to happen you're going to whether captured by the handle or you're going to capture it by the blade so what does that mean as far as with equities well in catching a fallen knife if prices are selling off strongly possibly come into a longer term area of support that may point towards some opportunities for traders if that support holds however likewise if it just goes ahead and slices through that support in the example of a bullish trade then one may be holding it by the knife and getting that cut and not a pleasant feeling okay basically anticipating that reversal now we've talked about different strategies on looking for a confirmation of the bounce a hold as an example although a hold is no guarantee uh that the price cannot break down and go lower as we've seen uh plenty of examples of that uh so let's go ahead and go to the thinkorswim platform and a couple examples uh looking at uh here well i mean you know from an illustrated purpose looking at the one that we had just closed out uh notice that the price did not hold that support uh but hasn't necessarily stayed belong there very long some traders may be looking for a reversal back into that range but notice price action is actually already off the low so we are seeing some potential bounce here and let me get it actually get up the right slide here here we go we're looking at coupe which is the trade we had just gotten out of okay here was the previous support we had a breakdown of that support and notice we have a bit of a hammer in action from today as the prices came off the low now if one went to go ahead and attempt to buy off of those lows that would be an example of trying to catch that fallen knife okay so a little contrarian in nature well let's go ahead and look at some other examples here and the screen should be up for everyone there i know there's a little bit of a lag i'm going to bring up ge for general electric now there's a fundamental story as far as with general electric they do plan on breaking up the company however it's going to take some time to do that i believe they're looking at 2024. we can see some of the downward momentum as far as with the stock after making some highs earlier in the month and basically selling off down to some previous lows and we can see that price action coming down to a support or potentially a support area we can go back a little further on this to see some of this range is going back to 2019 and you can see how previous resistance resistance potentially acting as support okay so with the price trading in the lower part of the range you know this knife may slice right through and continue going down may potentially hold that support and bounce so if one's looking for okay well what is a way that we can possibly do this trade uh defining our risk a little bit uh let's go ahead and see what i was looking at uh earlier here can't remember what i'd put in saved a few examples of some orders earlier may not have saved right but was looking at an example and this is actually something we teach in our long verticals and diagonals class on thursday is possibly doing a kind of a stock replacement going on a longer duration and then possibly reducing the risk on the bounce by selling an option against it now we've done a lot of long uh call verticals in this class this would be an example of what's called a long call diagonal uh a vertical would be different strikes in the same month hence the vertical but since we are looking at different expirations that would be considered to be a diagonal if i went ahead and took a look i go to the trade tab to have a little more of a stock replacement looking at a longer duration well above 50 days in this example 80 days now if you scroll down also look for a strike as an example that may be a little more in the money to kind of simulate that potential stock uh let's say i was looking at the 90 strike that 90 strike has a delta of about 60 uh to 70 delta there so in this case we have a a little more in the money that option would cost about uh nine dollars and sixty cents per share we can position size this if i do one contract that's theoretically risk about 960 dollars now that's a defined risk right there uh from the standpoint doesn't matter how low general electric goes uh the most that this potential trade can lose is 960 dollars but let's say we want to go ahead and reduce that a little bit more and possibly even make this even nest potentially even a shorter term trade if we have a a target in mind um if i go ahead and we'll minimize this and then we'll look at a closer up expiration i think i was looking relatively closer 17 days out for december and look at a strike uh that may be a little more out of the money kind of think around a 30 to 40 delta and so we have a 97 uh 98 kind of in that range you could probably even look at uh the 99 and uh or even 99 and a half kind of around that 30 to 40 delta now here we can actually sell a buck 30 or so if i hold on the control key and hit sell now it's created that diagonal we've reduced the net cost of that trade so now we're at 811 dollars but notice uh we don't have information as far as the risk profile here so what we can do is actually go to the uh analyze tab on the thinkorswim platform so i'm going to go ahead and we'll edit that we'll go to uh and we can right click on the trade and do analyze trade and make sure i don't have stuff from earlier today but here's our diagonal and you can see the characteristics on kind of a simulated stock position kind of that diagonal line going from the lower left to the upper right but notice the gain is going to be capped uh in this case a gain is going to be capped around that short strike so we believe over the shorter term that the price may be trading up to that 99 strike we can see what the potential profit is although this may adjust as far as uh volatility volatility rises uh it'll push it higher volatility drops it can diminish it a bit but we can see that there are multiple ways to profit from this whether it goes up down or even stays where it's at we have a break even where if i go over here to the far right where it says price slices next to the plus sign i'm going to click on next to the plus set slices to break even and we'll go to that short strike expiration which is basically a little over two three weeks from now and right now showing the break even as being 94.42 cents so if the price uh basically stays above 94.42 theoretically this would be a profitable position and notice that's pretty much kind of at or near that low so if this support holds we get a bit of a bounce this would be a profitable trade and with the risk of about 800 dollars uh i believe that maximum gain again was closer to about uh 300 per contract i got that on here right so as far as with uh you know that probably be about 40 return uh over the course of the next three weeks okay so that's a one example of a trade that we can do to anticipate that potential bounce assuming that support holds i'll go ahead and i'll do this two times it gives an opportunity for scaling out so you can see the risk on this so consideration you know if you're practicing on an account you know how much of your account are you willing to risk in that next trade 1600 is a relatively small amount given as far as with the size of this account okay i'm going to go ahead and hit confirm and send and we'll go ahead and send and attempt to get that filled all right so we did uh one example that would be a long call diagonal so that can actually have multiple durations you know one we may just have a shorter term uh to see if it trades up into that 99 close 100 dollar area and potentially lock in that gain going into that december expiration or may have an opportunity to continue selling additional calls against general electric if that trend continues to potentially reverse and attempt to profit from the longer-term option while also reducing the cost by selling calls against it some traders refer to that as a poor person's covered call okay so if we go ahead and uh and the question is uh why sell in the money why sell in the money oh i'm not sure i understand the question zeke may be referencing something else but we basically bought and in the money and sold and out of the money with the shorter term target trading up into that 99 area which is actually not too far away from where we were uh just a few sessions ago okay all right let's go ahead and look at a another one other one was looking at was autodesk ads k as we look at autodesk autodesk consolidating out of support now now as much of a falling knife in in this example as far as today although it is trading at the lows we haven't necessarily seen a bounce either if we uh go back a bit again you can see the idea on looking at more of a longer term area of support and resistance and whether that knife cuts through support or holds and bounces we can go ahead and take a look at that and i think the example uh uh for this one uh was uh looking at a uh see actually i may not have actually constructed that so let's go ahead and take a look at it so we're going to go to the monitor tab or trade tab uh look at duration now you know 17 days is is not a lot of time if one is wrong in that direction whereas one goes a little further duration may have a little more of the benefit we may be able to look into the weeklies however keep in mind sometimes these spreads can be quite large as we're seeing right now on these ones that are 30 days out ideally we like to see the spread being no more than 10 percent of the ask price uh in fact let's go ahead and look at another example and maybe you've got time we'll slip back on autodesk another one was looking at was baidu bidu now this is a a chinese adr which obviously uh can be impacted by you know international events uh local their local economy currency things like that it's kind of a similar situation what we saw with autodesk kind of consolidating at that support if we go out a bit you can see some of the thoughts as far as some of the previous lows kind of hanging around that range may have to go back even further to identify some of those areas maybe i just extended it out a bit there we go going back to some of the previous highs from 20 late 2019 2020 kind of hanging around that area okay now if we go ahead and look an example on this one i think i had constructed one there maybe i didn't i was actually looking at this one uh on a shorter term uh relatively shorter term basis looking out the 17 december uh earlier in the session it had about 1.93 debit be interesting to see what that is right now uh was looking at buying to 148 and selling the 152 and a half let's see if we can construct that there so go to the trade tab 17 days out let's see again was looking at i've had a few examples that we're looking at there he's even playing around with the condor with that'll be another subject there yeah so looking at the 148 this one's a little more into money there if i right click on this and do a buy vertical it's going to default to the very next strike now if i select about 150 250 that's making the assumption that the price would be trading well above where it is right now uh about two dollars and fifty cents above where it is right now so that's not necessarily a large move notice the debit i think is maybe a little bit more than what i looked at earlier there if i hit confirm and send with the long call vertical we can see our breakeven is pretty close to where the current price is right now so if the price holds that support and at least drifts up this potentially can turn into a profitable trade and it's about a one to one based off of that risk reward since we are pretty close to where the current price is right now okay uh make note it is a defined wrist so if if the knife does cut uh we know uh how much we're going to bleed believe to you to continue that analogy 230 dollars per contract so if i wanted to risk let's say a thousand dollars on this trade i can do this four times hit confirm and send so we're risking about 900 to make 900 uh break even again pretty close to where we are right now and as far as profit management if we're able to capture about half of this think about the other spreads that we did on the profit management uh if we're able to capture about half of this which would be about 400 450 gain then we can close it out as an example another if there is a a big push over a relatively short period of time let's say over the next week and maybe we're able to capture about 30 percent that could be a profit management target as well all right so let's go ahead and uh let's edit this uh again notice the the spread difference between the market price and where the mid price is we can attempt to fill at the mid although sometimes there could be challenges with that the closer we are to the natural price uh would increase that probability this is a demo account uh your results may vary i'm going to go ahead and send this through notice that didn't fill right away we'll see if it does do that during the course of our lesson here let's go ahead and double check on what we had said we were going to go over today we're not done yet we still have a few moments left we reviewed some of those current market conditions and we can see how things have gone a bit back and forth today primarily more towards the downside we reviewed some of our uh open practice positions with the emphasis on profit management however uh lesson learned as far as with coop uh on when we get closer to expiration and likewise when one hits a profit target on how quickly those profits can be diminished if management's not taken care of also two and a main reason i wanted to show you while the position was still open that in the money long option when prices fall in between a spread whether a long or short spread there would be some action that needs to be taken to avoid a automatic exercise in the case of a long option or an assignment if you have an in the money short option okay so some considerations there and notice what's important here is regardless of our bias whether bullish or bearish we did some bullish trades bearish trades from last week we did some a bullish couple bullish examples for today is being conscious of defining risk have an understanding of what that worst case scenario is and that's why there is a an attraction to options trading options are not for everyone but we are able to at least an attempt to define risk whereas with the stock and we've seen plenty examples as far as post earnings uh where uh you've seen things break down just trying to think uh of a few uh more recently um gosh i don't know why i'm going blank since there was uh a few of them you know something like nordstroms you know where the price was trading at 36 one day and a week later it's trading at 31. uh that's

on a stock trade that could be a significant loss on an option trade it could be a significant loss too but also keep in mind it is defined based off of what was paid for that option so if one had paid let's say two dollars or three dollars for an option even though the stock may have lost about sixteen fifteen dollars in value per share uh the most that that option can lose is what was paid for that okay all right let's go ahead and take a look at uh one more since we are round things out we do have just a few more moments there uh another example uh was looking at we uh let's make sure we got our trades in here still working so there's the one that we still got working on baidu i'll make sure that gets filled we have the diagonal on general electric autodesk i'll leave that one alone uh for uh now but may re-evaluate it uh tomorrow with our breakout and reversal class or on thursday with our long verticals and diagonals i'll see how that's shaping up uh another uh and also keep in mind a couple of stocks that are still in good overall trends and these would not be examples of fallen knifes but relative performance kind of in the bio front here's gilead sciences this is a tie into our breakout and reversals class which tomorrow we're going to start with the basics as it is a promoted webcast i'm probably going to have quite a few newer students on there so we're going to keep it simple but here's an inverse head and shoulders that broke out and we're seeing some flagging action uh even though with a down day not as bad as other stocks so if the market was to take a bounce you know question mark would gilead break out potentially a bull flag so looking for a breakout of resistance uh the other one which we do have a practice position on uh abv we have 500 shares in the practice position from various classes we've also sold some calls recently against it uh at least two calls uh generating little income which has benefited from this pullback but notice the same deal uh double bottom formation broke out kind of consolidating and notice we're still above some of these averages here all right so uh now this could be a fallen knife as well uh as it's falling down to that support whether it's going to break below um you know one we'll see and one maybe keep an eye to see if there's kind of a little more of an inside day or a candle reversal looking for the bounce and looking for the follow-through breakout all right so hopefully folks you learned something new today as we went over once again those current market conditions and uh let me take a a quick uh glance here as we bring up the spx you can see me on a split screen here just kind of playing around on the video so we're still kind of close around the lows there but holding uh that 55-day moving average for now with 15 minutes left so definitely not a strong bounce in the market and as you look at the russell a little more lift there on the russell coming off of those lows we'll see if there's any kind of follow-through so that may be looking at areas such as energy uh financials materials to see if they get a lift uh tomorrow as well okay well folks uh if you enjoyed what you learned here today consider clicking like that'll let us know that you've enjoyed what you've learned here today and you'll also see in the lower right over here somewhere as my hands block that subscribe button uh you can subscribe to our trader talks channel and it gives you the ability to be informed of not only great webcasts like this but also my good friend pat maloli who teaches advanced technical analysis uh every friday i believe at noon time there okay dylan likes the split screen thank you very much picked that off of ben watson last week there and so hopefully some good transitions there as long as i go back to the other screen so you can see those wonderful fantastic charts right okay hey folks remember in order to demonstrate the function out of the platform we did have to take a look at actual symbols keep in mind t ameritrade does not make recommendations or determine suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility so take care everyone have a wonderful day we'll talk to you again real soon bye now [Music] you

2021-12-03 18:49

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