Options Insight: How To Trade The Push and Pull

Markets are giving mixed signals: How to trade the push and pull.

The week going into Labor Day weekend is usually fairly quiet in the markets and this year was no different.   The nice recovery this week (SPX +2.50%, NASDAQ + 3.75%) from a steep sell-off the last couple of weeks  puts markets in a very mixed situation.   

Good price action this week mixed together with contradicting downward sloping moving averages can lead many traders into confusion. As an options Trader it allows us to pull out our third market direction, and use more sideways strategies into this week.

What I mean by “mixed signals” is fairly straightforward and I will elaborate..   The 2-3% percent rally that we saw this week was preceded by a sharp sell-off earlier in time which is causing the 20-day moving average to Criss-Cross with the 50-day moving average.   This is a bearish signal for many.  

That being said, this week’s price action surge caused current levels to be sitting above those crossed moving averages. So the charts are flashing quite the mixed signals!

Basically what you are left with is price above the 20-day moving average but the 20-day moving average is currently trading below the 50-day moving average which is somewhat bearish.  

On the bullish side we have a rejected “Head and Shoulders” formation with price action that would not go any further down to break the neckline, but instead moved higher (see below) . 

When I grade the markets every week for my Traders, my “am I bullish or bearish?” line in the sand is always the 50-day moving average.   Since the price is above it I cannot be bearish but since the 20 day is below the 50 day I cannot be bullish either.   

So just wear the heck does that leave us?   Simple: That leaves us with sideways.   Until I see the 20 SMA above the 50 SMA and some positive sloping price action, I just can’t “step on the gas” in good conscience.

This does not mean I won’t have  bullish or bearish setups in my trading basket, it just means that they will be less aggressive when choosing my targets and options strategy selection, and I will be adding sideways strategies to fill in the blanks. Options trading always offers me this flexibility.  

With the VIX rolling over this week (see below),  I’m confident enough to add some bullish exposure and will continue to do that mostly in the energy space. 

There are many to choose from here but one that particularly catches my eye is HP (see below).  If HP manages to stay above $42 it can easily approach $45 which is where it was trading in early July . 

$50 could even be a secondary target if the overall market heats up. With the right option strategy, I can go after my first target, sit back and wait, then select a second area of resistance further out in time as things play out.

Another sector that seemed to “miss the memo” of the 20 SMA crossing below the 50 SMA is the communication sector and particularly Google (see below).  These are the two pockets of positive price action (energy and communications) among the other sectors stuck in “nowheresville”.

If you are wondering how to execute a sideway strategy feel free to spend some more time with us where we provide weekly coaching on these subjects, but I will show you a quick example here.  

The “butterfly” is a powerful options strategy that is ideal for these conditions, and allows you to profit from sideways price action.  You are simply running out the time clock and collecting revenue as a stock remains in its range.  A great example below is:  HALO (see below): 

This week may determine a new direction in the markets as moving averages attempt to play catch up to price action, or the other way around.  To me and other options traders, outcome doesn’t matter, because the plan is always the same:  Trade what you see and not what you hope.