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The Weekend Shift – Episode 16

The Price Action

This week was better than last week just, because it was easy to see where the natural buyers were. They were going to defensive names. Mostly in XLP. When the market was flat Monday, and Tuesday you could see the buyers rush into Walmart. Then Mondelez, and General Mill on Tuesday. When the Market is flat, look for natural buyers, and sellers.

Is this gonna Go?

In the chat I am seeing Straters ask, “If I take this trade how do I know this is really gonna go?” After you have put in the work, went through the Strat trade checklist, and finally talked to Rob the only thing left is to take the trade. You will know immediately if its working or not. Set your stops, and if you don’t get stopped out you have a winning trade. Now you set your stops even on the next 2-2 continuation up. If it reverses back down, and it hits your stop, you lose nothing. Keep pushing them up until you get stopped out with profit.

The broader averages and the Weekend winners

The price action for this week was flat, with nothing really moving until the Fed report on Wednesday. We were looking for the outside month on the S&P500, we were a dollar shy of doing that. The top of the previous month being $473.58, and this week stopping its upward movement at $472.68. As Rob says, “Back through the Tri she goes.” This week is still scenario 2 up, but it is red. It is a lot closer to going 2-2 reversal back down next week. If that happens, we are back to a 2- 2 reversal month down. The bottom of the weekly broadening formation is $447.40.
This is when you really have to trade with the trend or stay out. If all you do is go long, you can find those stocks with natural buyers. They are buying no matter what, and they do not care about the broader averages. The biggest thing to remember with that is you must understand it may not hit magnitude. Create the winning position, and push your your stops up. When working downside price action, keep an eye on the SPY, DIA, and QQQ. If you are working puts, watch the that 5 min to know when a reversal is starting against you, and just take the profit. Also if you are not in a Put yet, you can use that 5 min to wait for a buy signal, then as soon as the next shooter goes in force on the 5 min hit it. Now you are in on the 60 min puke fest. Overall, stay in your lane. If you are not good at options, do not mess with them.
The top winners from last week’s Weekend Vid from Rob Smith were:
  1. ADOBE (ADBE) 1-3 DOWN
  2. DECKERS (DECK) 2-2 CONTINUATION
  3. UNION PACIFIC CORPORATION (UNP) 2-2 REVERSAL
  4. JOHNSON & JOHNSON (JNJ) 2-2 CONTINUATION
  5. ELI LILLY (LLY) 2-2 REVERSAL
  6. NOVAVAX (NVAX) 2-2 REVERSAL
  7. TARGET (TGT) 2-2 CONTINUATION

The Spread

The spread is the difference between the Bid and the Ask. When trading common this is usually close together. When trading option this can be a totally different story.

Most options traders do not take options with spreads that are more than 10-20 cents. Anything more than that, and you are asking for trouble. If you take an option that has a 50 cent spread if you have to cut it, you have no choice but to take a 50 cent loss on top of being wrong in the direction of price. Now imagine having a winning trade on an option with a dollar spread. You decide to take your profit. You may still be selling for a loss, because the spread is so large. In the future pay attention to the options spread. It could be the difference between winning, and losing even before you start.

What do we know to be True?

Trade what is happening right now.

We all have to admit, this week was not the easiest week ever. There still were some good opportunities out there if you looked for them, especially if you had the right mind set. It’s easy to be cynical when you had a rough day, heck even a rough week. What is most important is understanding that this is not a get rich quick scheme. This is still hard work. Trading is hard work, plain and simple. We have to keep a positive outlook on what we are doing so that we can see the reversals presented to us. If we are in a negative mind set, we will naturally block out any notion of success. When the market is flat, look for the natural buyers and sellers. They will stick out like a sore thumb. Then look for reversals into those stocks. Trade what you know to be true. For example, this week, General Mills and Allstate were working toward the highs on 2-2 reversals on the week, when the rest of the market was puking to the downside. These were stocks that had natural buyers. They are defensive names as well. It was obvious that the market was dumping T ech and buying cereal and insurance. This is a funny way of saying it, but it’s true. I use humor to keep my head in the game. I may not always be in a winning position, but I am always making decisions that I know to be true. What did I know to be true? They dumped Tech and rotated into XLP. This the Consumer staples ETF. All you had to do was listen to Rob call the tickers out that were doing the same thing as the main XLP chart.

“They were buying cereal and insurance”

The options spread on these stocks were not great at all. That was okay, because all you had to do was buy shares. You can still make money with the Strat, and trading period, by trading common. One of the Straters in the Live chat said it best. With options you have to get three things right. You have to get the strike price, the greeks, and the direction right. With common, you only have to get the direction right. That’s it. So what, you don’t get your 1000% gainer that you can post on Twitter. What you do get is the confidence that your stops will be tight and you don’t have to worry about slippage. You also don’t have to sweat bullets the entire time you are trading. You can have total confidence in working a 2-2 reversal on the 60, daily, weekly, or monthly, knowing you are in a winning position. You can do this while you watch everyone on social media talk about how they can’t catch a break.
Zoom (ZM) was another great example of working something that has natural buyers when the rest of the market is puking. It went 2-2 reversal up on the day, without any gap ups. This was called out in the chat and some traders jumped on it. There were two hours of 2-2 continuations up. If you were patient, and didn’t get the FOMO, you would have seen the inside 60 on the third hour of the day. It formed a hammer, then the next Flip, BAM, it goes in force at $195.
Then it runs to $200. Getting shares on this would have gotten you $5 a share. The question after that is, how much do you get in with? That’s where the Strat customizes itself to you and your account size. I tell you what, I’d rather take 3-5% on shares, than -50% in options any day of the week. Now people that saw the Jam Trades episode, that would have gotten you in at R3, and you would have worked it to R4. Push your stops up and get stopped out with profit. On a hard week of trading, ZM was a godsend.
For people shorting stock via puts, you wanted to hit names that were totally getting wrecked. Target (TGT) was just a huge target. It was already 2-2 reversal down on the month, and 2-2 continuation down on the weekly. Draftkings (DKNG) was also great for downside action. What you want to do is wait for some Triangle They Out on a smaller timeframe. Wait for the 60 to go in force to the downside and go down to the 5 mins. Wait for the 5 minute to start reversing to the upside, then as soon as it forms a shooter and goes in, force hit it. Not only are you getting the option cheaper, you are rading a reversal in the red. This will put you in position where you know this is going to work. I like to wait for my option to start working, and then put a $0.05 trail stop on it. This will guarantee that I get stopped out with profit.

EYE ON IT

Low Volume
We keep hearing about this Santa rally. Well we haven’t seen it yet. Next week is Christmas. It’s a good time to close the laptop, and finish your shopping for the holidays. There will be low volume, because the Institutions will be taking time off. This gives the Market Makers a chance to fool around with the price. Don’t get caught up.

Software

Weekly Tips
The Disjointed Channel tool found in the TradingView drawing tools is a quick, and easy way to draw broadening formations. This is great for beginners, and a no hassel way for experienced Straters.
Quickly draw them on the 60 mintue time frame during trading day, and now you have more context as to where the price can go.
In summary, what we do is listen to what Rob is calling out and use that to create winning position. Once you learn what we do, you are the Trader, and Rob is the World’s Greatest Assistant. No program or scanner can do what Rob does. He is telling what the Market is really doing, in real time.

This Week’s Strat Q&A Tips

Q: What is the correct way to draw broadening formations?

A: Rob says all the time that you don’t need to draw them. You just need to remember that they exist. You can you a trend line tool, or an extended line tool to draw it. Start with the recent highs, and draw it back from right to left to a lower high. Then draw it back from a recent low to a higher low. This will give you the triangle Rob is always talking about. If you are having trouble drawing it on a certain time frame, go to a higher time frame. Drawing them on the weekly, or monthly is the easiest. You also don’t want to cut through a bunch of candles. No matter what, the main point is to use them to gauge magnitude, and find things going through previous range. Don’t let people get all over you about the “correct way.” Just remember, why you are using it. You will get better at them, and you will see the Strat much easier with them. Price discovery is done through a series of broadening formations.

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