Range Bound and Down

 

Date: 7/18/2022
Author: Chris Hood

 

 


If you aren’t a day trader, there doesn’t seem to be much going on in the market.

However, this is just the nature of the market in summer.

Remember that the market moves because big money traders buy and sell shares. It’s something we call liquidity.

The same traders pushing the tickers up and down during the October to January months often take long vacations in the summer. They don’t trade much because they don’t have to…and liquidity dries up.

The result? Not a lot of big moves in either direction.

Like you, they’d rather be sipping Mai Tais on the beach than sitting in front of the computer screen all day.

I’ll admit, for swing and trend traders, money isn’t made quickly during the dog days of summer.

And lately, it’s more challenging than usual.

As I discussed in my last piece, the market trend is definitely down. However, SPY has been range-bound for quite a while. It’s like watching a table tennis match between 390 at the top and 370 at the bottom.

Obviously, you can trade these quick movements in short time frames.

But what can you do if you don’t want to deal with that much trade management?



Eventually, it will break out to the upside (very unlikely given the monthly and weekly charts), or we’ll see it drop like a stone.

This latter situation is my thesis.

With this in mind, here are a few longer-term trade ideas that make sense.

First, consider selling call credit spreads above the key level of resistance. For example, when a stock is stuck in a range and the general trend is down, selling call credit spreads with short strikes above 390.00 seems to be a reasonably high probability trade.

Time is on your side, and they’re bearish positions, so you’re following the trend.

It may take a while for these trades to close, but as long as you eventually win, it shouldn’t matter. Impatience is a cardinal sin.

For some, it may be tempting to sell iron condors, but I’d caution you against that.

Despite the strange name, the iron condor sells a call credit spread above resistance and a put credit spread below.

Looking at the chart in hindsight, this may seem like you’re getting more bang for your buck – earning money on both sides of the chop.

But with such bearish long-term charts, the downside risk is just too high for my taste.

I believe the market is going down; I just don’t know when. And I definitely don’t want my bullish positions to get smashed and take back all my gains.

Second, you could trade butterflies.

A butterfly has a high payout if you can “catch” the stock price between the two wings. They have an extremely high risk-to-reward ratio, but the probability of winning is low.

However, a single successful trade can pay out enough to make up for several losers.

Finally, you could just trade off the weekly chart and follow the trend down. A long in-the-money put with an expiration of 90+days will probably net you some profits in the coming weeks.

It’s just essential that you don’t overpay for these options.

When the stock price runs up towards resistance, make the purchase. When a ticker rises, put prices fall, getting you into the trade with less expense.

If you buy puts on equities as they move downwards, volatility will increase the price. You give up potential earnings even if the ticker moves in your favor.

Remember, these are just ideas, not specific trade recommendations. You can still lose if you don’t place these trades correctly.

So join us at Alpha Hunters and hop onto my live webinars each week. Let me help you get geared up for success.

Cheers,
Chris Hood


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