Stocks & Options For Breakfast | Bull Market Breakouts

  1. Stocks

 Long stock ideas

  • Financials (BAC, GS) with potential for pullbacks but overall bullish 
  • Healthcare (BHVN, JNJ) showing relative strength 
  • Technology (DOCS) early uptrend


Short stock ideas

  • Basic materials (AEM, STLD) clearly bearish sector
  • Energy (XOM, CVX) at support levels but potential to go lower 

Risk management

  • Position sizing critical in volatile markets 
  • Use stop losses, but give room on strong momentum stocks 
  • Managing winners just as important – trail stops, take profits

Managing new highs

  • Use volatility (ATR) and chart patterns to set targets 
  • Identify next resistance levels 
  • Don’t avoid just because stock is extended

Earnings

  • Understand risk vs reward around events 
  • Consider probability of breaking out or fading
  1. Sector Rotation
  • Technology leading, healthcare and financials catching up 
  • Energy, basic materials lagging 
  • Taking advantage of relative strength and weakness in sectors
  1. Options

Long option ideas

  • Vertical spreads – lower cost basis vs straight calls 
  • Diagonal spreads – aggressive directional bets 

Short option ideas

  • Bearish credit spreads selling out of the money calls 
  • Take advantage of elevated volatility 

Managing positions

  • Rollover short legs for additional premium 
  • Leg into call ratios after vertical spread wins 

Identify opportunities

  • Find elevated implied volatility vs market IV 
  • Compare sectors and single names
  1. Stock Market
  • New highs driven by tech leadership
  • Uptrend faces near-term resistance levels 
  • Few sectors participating so far
  • Monitor leadership to gauge market strength 
  • Prepare for election year volatility
  1. Options Trading
  • Take advantage of elevated implied volatility 
  • Balance directional trades with premium selling 
  • Monitor key levels around events like earnings 
  • Adjust position size for volatility expectations 
  • Look for opportunities across sectors and asset classes

Transcript

 Hey, everybody. Good morning. It’s a happy Saturday after the way price action unfolded on Friday. That’s for sure. How’s it going, John? Good morning and happy Saturday, everybody. And yes, it was an interesting Friday. That’s for sure. All time highs. Not just highs, all time highs, with the exception of Russell, obviously, which has lagged a little bit.

Yeah.  NASDAQ, S& P, Dow finally joined the party a little bit, but I think Dow finally joined the party because financials, After earnings picked up again and started heading back up. So they were stuck there for a little bit. NASDAQ deservedly so getting a lot of the credit or a lot of the attention.

And we’re going to, we’re going to break down how big. The move was in NASDAQ  and where the attention should be. Cause you know, John, you and I were just talking a little bit about the fact that there’s trades on both sides of the market right now. Energy definitely has been bearish for a while.

Basic materials have been bearish for a while. I think that most people only like to be long. I think that adventurous and as you get a little bit more experience. You want to dip my side of the market. As for us as people calling like you said, when we’re  highs, it’s tough to call  in the big picture of the  stuff that’s weak, you ca  Against your longs on those kinds of ideas.

So kind of how does that play into the option side with the basket? Yeah, 100%. Like one, one thing about what’s great about being a basket trader, and that’s pretty much what I do is I look at, I look at the market holistically and I try to find bulls and bears at the same time. This is the kind of market where right now is probably one of the more exciting things.

January, we wanted to see what, who the haves and have nots were. And now we’re starting to see a little bit of a trend. So you have technology, which is fantastic. It’s always been, it’s been one of the leading sectors, obviously for a long time now, but it’s been joined now by by healthcare and by financials.

And a little bit of communications as well. And those are your haves, and those are your longs basically. But also what’s great about being a basket trader is you now have great short opportunities you have on the opposite side of the spectrum, which is actually very rare, by the way.

Usually when the markets go higher, they all go higher. When they go lower, they all go lower. In this case, you have this barbell kind of situation going on. Picture like a weight set, right? Like a barbell where you have like the ones I just mentioned on one side. And on the other side, you have now energy, which has been lagging for quite some time, but now you have basic materials and you got some sideways stuff too.

You got some utilities and even real estate or, isn’t, not all that great. So you have like opportunities to go sideways in like utilities and real estate. You’ve got opportunities to go short. In basic materials and energy. And obviously, like we talked about with semiconductors rallying and taking technology higher, even though we’re at all time highs, you have to be bullish, even though it doesn’t feel good.

You have to I, it took me by surprise. I expected a pullback and we didn’t get it. So now what I’m going to do is maybe we get a pullback this week and we could talk a little bit about that, like how to position yourself this week, but I, you have to be bullish, but that being said, you do have this bearish group of stocks that you should be doing bearish trades on as well.

You know what I mean? So as a basket trader, it’s important to realize that and to not just be. On one side or the other, yeah, so I think the question on the table now is at the market is doing pretty much exactly what you would want it to do. Getting back to losses versus wins right now. This is a tough four weeks where we’re just chopping back and forth.

We saw that in the bigger picture here where you can clearly see we’re going sideways, the Dow still on the verge of breaking out four weeks of sideways here.  So we spent a lot of time and I want to finish up a point that I was making on yesterday morning’s game plan call, which was. When the markets are less than perfect, which we did, we weren’t necessarily saying we were going down, but we certainly weren’t exploding to the upside like we did yesterday, which called for lower position size if we weren’t punching through and the reward wasn’t justified for the risk, still had plenty of good ideas.

But a lot of them didn’t follow through and there was some losses in there on, on swing trades that lined up good but didn’t follow through and we been pounding the table. I have been pounding the table that I’ve reduced my swing trade position size. Until I saw what I want to see and there were some losses in there but the point that I want to make and I want your perspective on this John because obviously, When you’re a head trader of a 42 billion dollar hedge fund you have you obviously allocation is a big deal and what kind of losses you’re willing to take based on  what’s available?

Like what is the likely profit potential and I think that yesterday was  An exclamation point on the concept of there’s going to be losses and if you keep their losses manageable and don’t let them get you down, don’t let them influence this. This doesn’t work because if it worked for two months in a row and then it’s not working for a week and a half, that doesn’t mean it doesn’t work anymore.

It’s the market conditions.  But the context of  managing the downside until we start to follow through, I think, was really exemplified yesterday because what did follow through and especially the tech stocks that did follow through were home runs in a very short period of time. And if you over traded in a tougher market condition when the market was going sideways.

You probably got back to break even instead of actually being profitable. Yeah. If you size at the wrong time, when markets are choppy and kind of range bound, like they were for the last couple of weeks, you’re going to get chewed up, you’re going to, especially with options.

Cause obviously time is your enemy with options too. So if you have even. Even if you’re in the right name, sometimes you get chewed up in the sense that time runs out and you might lose out, you might take some losses that way too. This was probably one of my worst months in I would say five months as far as the month of January.

Only because on my long positions, they didn’t get chewed up necessarily, but they just fizzled. You know what I mean? But what I’m really excited about now in January usually is a tough month because like I said, you’re waiting to see, it’s almost like I made that analogy when you’re at the horse track when all the horses are in the stall and you’re waiting for that bell to go off, some of them stumble out of the gate, some of them just take off and fizzle and you want to give it a couple of weeks to see who’s going to do what.

And right now we’re starting to see a clear cut pattern. And that’s why I’m excited about the next couple of weeks. I think that as a basket trader, I need to just follow what’s going on in front of me. I’m really surprised that technology continues to rally. I did expect a little bit of a pullback, especially from last year.

But you know what? You have to be bullish, you have to be bullish and you have to continue to pick the horses that are continuing to be bullish. But what’s great about this situation now is you can be balanced. You can do some. Sideways and some bearish stuff on the option side, because now you have clear cut winners, clear cut neutral and you have clear cut sideways, and bearish to as things go forward, everything in there.

Yeah, you really do. So it’s that’s what’s really cool about it right now. I’m excited about it because now we have a little bit of a little bit of a clear cut situation going on where we could start making some decisions. But, like I said, I think that this week. We only we were range bound for the pretty much, you saw that kind of range bound activity in the S and P for about four weeks.

You said that’s not a super long time to be range bound. Sometimes the S and P can be range mount for six months, right? And the longer your range bound and then you do get a breakout, the more believable and usually the stronger that breakout is. I don’t like to do the yeah buts because I like to trade what’s in front of me, but one of the, but one of the yeah buts I’m going to talk about right now is the fact that the fact that you did go up on lower volume, not the greatest volume, number one, number two, it wasn’t every single sector, right?

So I wouldn’t be surprised and I don’t like to predict what’s going to happen this week, obviously, but I wouldn’t be surprised if we got a, we get a pullback right back to where we were. And then maybe then we move higher, so what I want to be clear to everybody is I’m bullish, but for the week, I’m going to position myself a little more, neutral to slightly bullish, and that’s how I’m good until I start to see.

This rally take legs, if we just keep moving higher and higher, then I’m going to obviously add bolts as I go along. And that’s how I’m going to handle things. But we can map that out even further, John, obviously, especially if somebody is trying to build their track record, trying to build their consistency, just running some starting to run my scans for Monday,  48 percent of the stocks that meet stacked order flow criteria, the way that we do it where technology. 

So if you weren’t involved in technology to some degree this week, you just need to  rejigger or rebuild or do it properly how you’re actually looking at ideas because it was ridiculously obvious that technology was the place to be focusing on. And there’s price points for everybody.

There’s Dell and Intel. Going back, to old school stocks in that, 50 to 70 range, still having some amazing moves going up a little bit higher tier. You have IBM also breaking out. Obviously, the semiconductors SMCI was just ridiculous yesterday. And I don’t know if Tim is on the call with us here this morning, but he picked it up at that.

Tim picked it up at that level that we were watching.  Awesome. 355 level and the thing just was. ridiculous yesterday. And so it takes us into other conversations, but which I want to, but I just want to get back to over here for one second,  which is if the technology area sector starts to see a little bit of a pause after a massive three day move to the upside, for the most part, financials are creeping up.

So let’s map that out already heading into next week. John, you had mentioned it before perfectly. I think that the banks specifically, let’s say JP Morgan and, a couple of those guys had earnings pulled back and they’ve now started to work their way back to the upside.

So if we started to do they did what they had to do and now they’re recovering, after earnings. Yeah, I think  at least you got to know the sector besides technology now that you can look at, that’s what I’m prepping everybody for because if tech does. Again, these moves have been just  glorious.

I don’t know if there’s any other way to say it. And you could have had a buy stop here, obviously day trading it.

We’ve been talking about the 355 level buy stop for swing trading, day trading, plenty of opportunity. But if they do pause, which again, 36 percent move, there’s a pretty darn good chance it’s going to happen.

Obviously AMD and Nvidia also having a pretty solid move over a very short period of time. Financials, I’m just telling everybody now on Saturday, that’s where I’m going to start looking or have a list of stocks ready to go. And that’s just off the raw numbers. They’re creeping their way back up.

This is over the last five days. And that’s where I’m going to start to look. I know some of the industrial stocks bounced a little bit, but they’re still bearish to me. Boeing really didn’t have  Boeing is really just a bear flag that’s looking to fill the gap right now. I’m not really bigger picture looking to do anything there.

The only industrial that I’m really looking at is GE right now.

Which has been holding the bid for almost 18 months. Really? Yeah. GE looks great.

And with Boeing, it’s obviously was an oversold bounce. If it gets to 230, I’m happy. You know what I mean? But, from the option side, there are things you can do with something like Boeing as a longer term play, I talk about poor man’s covered calls all the time.

This is starting to look like a pretty good candidate for that. As long as you believe that Boeing is not going to make. Lower lows that are already made, and the way to really, see that we do have earnings, I believe on January 31st it’s not too, it’s just around the corner, so it might make sense to wait and see how that plays out.

And then jump into a leap, do like a one or a two year contract on Boeing, and then you could sell monthly calls against it. As Boeing recovers, if you believe in the longterm story, if you think that Boeing is not going to get much past 200. Below 200, I should say even if it meanders sideways from and it was range about for quite some time last year you can make a lot of money potentially with a range balance situation with Boeing, because it tends to trade in like a 50 range, which is a pretty big range.

So you can sell premium that whole time. So that’s something I’m looking at. But again, as far as like just a really strong, long idea, probably like you said, more of a bear flag. You know what I mean? On a poor man’s carbon coil Joe, which price would you be looking to buy the LEAP? So the, so there’s a couple of ways to do it.

Obviously I generally like to pick the furthest one that’s available. That just gives me the least amount of theta to worry about, the least amount of time dec care to worry about. And what I’ll gen, and you have two choices. You could pick the, at the money strike, if you go out, let’s say two years, a year and a half. 

That will give you a little bit more of a pop if like volatility kicks in and the thing was to just rip and vol picks up. Or you, if you want a smoother, if you don’t want it to wreak havoc on your P& L because you’re going to be keeping it in your portfolio for a long time, you can do something a little bit deeper in the money, like a 70 Delta, which will put you, if it’s trading at, let’s say, I think it’s a 214 right now.

Let’s say you look at the 200 or something like a little deeper in the money with maybe a higher delta, it won’t jump around as much when things, if it was to like, let’s say, sell off by two or 3%.  So it just, that might, if you plan on keeping it for a long time, a deeper delta might make more sense. 

Okay. Dileep said, if we’re truly ready to go higher, I’d like to think the risk on small caps. We’ll finally have a sustained breakout from their trading range from last June. I think the reason why small caps underperformed this week, and this is just, again, cocktail talk. If we were sitting around having a beer I would say that probably if you take a look at the 10 year did not roll over.

The 10 year was actually up also this week. It was, it stayed, I think it was at 415. Yeah, we drew this box last week and it did break out. Yeah. So that’s the reason I think why these smaller cap names did not join the party. And that’s something to keep an eye on, by the way. Again, I talk about the yeah, but right.

So yeah, we haven’t yet like coming up in a lesson that I want to talk about because We’ve had a lot of problems with a good problem with stocks just rocketing and having so much of a profit in such a short period of time. Trade management on the winner has gotten a little bit of a deeper conversation.

Yes, it’s a good problem to have, obviously, but yeah, I think on the stock side, it’s more challenging. Definitely, because you’re essentially, you have larger positions, you have more capital at risk, so you got to be more careful with your stops. Obviously, you don’t want to give back all those gains that you made.

You know what I mean? So I think being prudent, I think what we talked about earlier about proper position sizing is probably the key. You know what I mean? Leave a little bit, if a stock exceeds your expectations, which a lot of these, especially if you were lucky enough to be in some of these semiconductor names.

Like AMD or the other one that you just mentioned earlier you have to really be realistic about your position size and just be really cautious about the overall market being a little bit, a little bit long in the tooth and a little bit, it did break out, but it only broke out on two or three sectors going higher.

So there’s the, yeah, but, right? So you have to realize where you’re at and say, sectors are actually a big conversation too, because we mentioned that last week about breadth. Yeah. You can clearly see here that it’s still all technology. We don’t have the market breadth right now where the rest of financials are up there and communication is up there.

We don’t have that right now. No, you don’t. And the good news is technology is the largest sector, right? So like it, it could drag the market higher. It could for a while, but eventually the weight of the rest of the market will drag technology back down if other sectors don’t join the party.

And I think it is. It is encouraging that we see health care and financials doing pretty good too. But, that has to continue. And we’ll see, and we’ll see if that, we’ll see if that continues as well. Because eventually technology will take a break. It’ll get sold off. And hopefully these other sectors will be rise to the challenge and take over where some of the order flow goes.

But. That’s a wait and see the, the the other parts of the market are not all that great. You know what I mean? Like what we talked about. So I guess I’ll break down that trade just a little bit more, John, because it’s been a, it’s been a topic of conversation, which is a pretty good one.

And like you said, a great problem to have and, the entry being down over here and then a, I don’t know what percentage this was, but,  like heading into that day, a 13 percent move in basically three days, which is a pretty fast move. But then the trailing stop loss is all the way down here.

Actually for that day, it was all the way down here. Almost we got into the trade and the conversation has been coming up. What am I supposed to do here? I don’t want to risk, the 20 almost 20 I just made in two days, but I also want to hold the trade to do, to follow the rules because following the rules is where I make money and then, we zoomed out a little bit and we said, okay.

I understand that. I don’t want to get out of it, but yesterday, the stock hit this level and pulled back really hard here.  And I’m like, alright, that happens again. I’m looking to scale back some of it, but hold for the next bigger move. And it did pull back, and then this is where it ended at the end of the day.

So this is where traders will go.  Batty in their mind. They’re like, but I want to hold it, but I want it. I don’t want the profit to take away two days in a row to open higher and pulled back. And then at the end of the day, it closed on the highs because the sector picked up and I left  10 on the table for the balance of what it did.

I think if your original target gets exceeded, if that’s, if that’s pretty much what happened the way I look at the rest of that is free money where, you know, you, it reached your target. So I would leave,  you could leave a small tail on, and then, if I was day trading a stock, I would leave a small tail on maybe 20 percent of my order size or something like that.

And then just loosen my stop. You know what I mean? That would be, because I wouldn’t really, I don’t want to, I don’t want to, I don’t want to be on Cavalier and say, I don’t care what happens, but at that point, I don’t care what happens because I already made.  The profit I was anticipating or that I was hoping for and that other 10 percent is okay, whatever and that’s actually a good point.

We didn’t actually talk about that yesterday. So that’s why it’s good to get a different perspective. We were talking more about the bigger picture of the bigger move and holding it, but we really didn’t even put into the conversation yesterday that it already exceeded the initial profit target in just 3 days, which was 3 to 1 risk.

So at that point, I would take off maybe most of what I have on, right? And then at that point, I would say what’s the overall market doing? So it always goes back to top down analysis, right? So is this AMD specific? The answer is no. It’s, is it sector specific? Semiconductors, which AMD happens to be part of, is the sector that’s hot right now, which the group, or I should say that’s hot right now within the technology sector, which is also hot right now. And you also have a rising market. So you have all factors. You have market sector, stock, all NASDAQ.

Semiconductors, technology, overall market, S& P making new highs you even want to get macro on you and talk about unemployment going down below 200, 000. You can add up all these mosaics, all these little puzzles pieces, right? And say, you know what? Let me keep the peace on.  That’s pretty much what we ended up discussing.

It was, it broke out, failed, broke out, failed, we kept some. But I like your perspective that we, I just looked, I just took a look. 168 was actually our initial target for the initial risk.  So we got up to that level and then it pulled back and then took off again. So it’s hard to say we didn’t, follow the rules when we did hit our initial profit target and we kept some of the balance on looking to trade around that position if it does pull back and hold again.

It’s a subjective thing to think about, but one of the things you have to look at is market participation,  right? The more of those pieces of your puzzle that you could add to your puzzle, the more market participants are buying this thing.  So if AMD is just up because AMD reported earnings let’s say the whole sectors, let’s say the semiconductor sectors in the toilet and so is the NASDAQ, but AMD had really amazing earnings.

How many market participants are buying AMD?  Probably people that maybe were short covering, maybe people that, okay, maybe some bottom feeders, right? And then the stock will probably roll over. You have no momentum whatsoever, right? That’s a much different picture than what I just painted, right?

Now you have AMD, sector strong, market strong. Market looks like it’s going great. Interest rates are going lower. Everything’s hunky dory. And AI behind it. Even IBM AI. Yeah, the AI story and everything else. So you have momentum. You have more market participants. And that’s how I look at it.

So if I’m in a trade like that, And I have to make a decision whether to exit the trade or whether to keep some on or trail my stop or make my stop looser I would lean more towards being  not conservative, being more aggressive because of all the reasons that I just mentioned. Now, if any of those reasons fall apart, if, let’s say.

NASDAQ opened up down on Monday because, there was a sector rotation or, there was maybe a semiconductor stock that had bad earnings on Monday, that’s maybe not, it’s not AMD, but it’s, in the same group, right? If the picture starts to look a little more neutral to negative, then it’s a whole different ballgame.

Then I would just take my money and run, and not be in the trade anymore. So I think what’s awesome for a lesson for everybody about what you just mentioned, John, is. It’s something we talk about, which we talk about building an argument for the idea, and how many reasons can you put into the idea.

And I think that too often, the question of whether or not I should hold the trade is asked with price only as the context for the question, as opposed to the five or six or seven different  reasons that you just rattled off, the sector, the market. Interest rates, AI, like all of those things in the equation.

And I think that everybody to level up really needs to understand it’s more than just price to make that decision to size up or size down. Yeah. You’re not trading in a vacuum. You know what I mean? And think in terms of all the market participants that out there, you’re trading in a market. So when you’re thinking of a market, if you’re thinking of an open outcry market back in the old days, if you’re back in the 1800s and you’re trying to bid on a cow.

Like how many cows are there? How many of the farmers are there? How many, what’s the weather like? You know what I mean?  How, yeah. What season? Are there any cheaper pigs to sale? You know what I mean? What else is going on? You know what I mean? Are chickens cheaper?

Like the, it’s the same kind of thing. You know what I mean? You have to have to think, you don’t trade in a vacuum, so you have to realize what’s going on around you. And right now things are good. The sector is fantastic. These numbers are blowing out.

NVIDIA came out with news last week about they’re expecting, everything to be great. They keep trying to get ahead of their earnings because with the good news, and  there’s just a lot of optimism in the group, especially with AI. And everything else. So is it all smoke and mirrors?

Could some of it eventually fade? Of course, that’s not happening right now. So you can’t try to predict what’s going to happen either. You have to just go with what’s in front of you. And it surprised me. I was expecting more of a pullback in the NASDAQ in January only because we’re up 40 percent last year, but you have to trade in front of you.

So you have to shake it off and say, okay, I wasn’t as much. Yeah. I wasn’t as heavily involved in technology as I maybe should have been, but based on what I saw, what I’m seeing now, I need to start loading up. So any pullback, I’m going to be looking to add to some of this stuff. So what’s interesting is I actually wrote about yesterday that it’s acting as if something’s about to be announced.

Like you just said, like we just exploded again in a big way, without any really significant news. So we’re rallying on. What appears to be something significant, which kind of takes us into if and when that announcement comes out, maybe it’s probably going to be, I’d say fairly certainly it’s going to be some other new AI announcement where somebody started to get a little bit closer to commercial use for it.

I know I use it a lot, but I use it for business, statistical analysis and a whole bunch of other things, but I don’t think the average person. Is using it for anything other than a better search engine where it’s basically giving you the answers instead of you have to click on a link and go find it.

So that kind of brings us into number one is to be very conscious of the second leg of this move. If something new gets announced very similar to the main point that I want to get across here is it’s rallying as if something’s going to happen and it hasn’t happened yet. So that could be a nice turbo booster if it does happen.

But the other part that I want to get across is.  comparing this to the dot com boom and specifically 1999 2000, middle into the first quarter of 2000 is when we started to roll over.  But technology dominated at that time, obviously, and there were small fortunes being made in a very short period of time.

What I want to encourage everybody to do is  don’t make this more complicated than it has to be. Don’t feel like you need to be looking at 500 stocks and having a hard time picking out of the 500  That sector and specifically that industry group have been on fire for a while now. They’ve been a topic of conversation for a while.

When they move, they’re going to move very quickly. You owe it to yourself right now. And I’m saying that very strongly right now, you have a responsibility to yourself as managing your money to be on top of this group, because it could be generational wealth in a very short period of time. And I don’t say that lightly.

I know we’re being recorded. I respect everybody and I never want to make it sound like it’s easy. But AI is a really big deal right now, and it’s going to be dominating the technology area, and everybody needs to have some focus on tech right now. The only thing you could really compare it to, like you said, is during that time period, right?

And that’s when I first started in this business, like in 1996, 97, 98. These dot com stocks and nobody really understood the vast potential that the internet might have people just sort as a way to, like you said, to search for things. Maybe I do a little shopping, to make life easier.

No one really. A lot of people just didn’t see the potential of how it would just change everything, which is very analogous to AI right now. Yes, that’s what I, that’s what I, that’s what I, that’s what I mean. So you’re absolutely right when you think it’s going to end, it might just keep going. And then you have to just trade what’s in front of you.

And the problem is when you have these drastic moves in some of these names, you will get sharp pullbacks sometimes. You know what I mean? So how do you handle that? How do you not get, how do you prevent yourself from getting knocked out of the box? That’s basically what we’re talking about.

And it’s about position sizing and just taking off maybe your initial investment and letting the rest continue to run. That’s, as a trader stocks tend to go down a lot harder than you expect them to. And they tend to go up a lot more than you expect them to sometimes. And this is one of those times. 

So that’s actually for everybody who did not trade at that time it’s a very deep cut that John just gave because it was very common back then Let’s say trading Yahoo or whatever it happened to bid for Yahoo to go up a hundred dollars in one day in the morning and pull back forty or fifty dollars in the afternoon and Rally another 100 over the next day or a couple of days like that.

So yeah, it sounds like Spider Man right now with great volatility comes with great responsibility. So you have to compensate, like you have to have that in your mind, that’s how these things are going to trade. But. If you are aware that’s happening and you’re prepared to make a decision, it’s going, it is not going to be, it’s amazing. 

Yeah, I think that on volatility is like one of those weird things where unless it’s happening to you, you don’t, you don’t account for it sometimes and in options land, it’s a little bit easier sometimes to account for it when you’re trading stocks, you have an obligation to really watch your position size as well as your stop, right?

That those are the most important thing. You have to realize that if you have a stock that moves a hundred dollars, like the Yahoo example, you don’t need to have a full position on. Yeah. You can have a quarter of a position on or an eighth of a position on and still make a fantastic amount of money potentially.

With options, it’s the same thing. One of the things that, one of the things that happens with options that is very disappointing sometimes.  Is when volatility picks up the temptation. And this is, and I do this all the time, I talk about it all the time. You, instead of buying a long call option, I’ll buy something like a vertical spread.

And what that’ll do is I’ll buy the long call, I’ll be bullish, but what I’m doing is when I do a vertical spread as I’m capping my games, right? So I’m saying, because it’s so volatile, I want to have a long and a short position because I don’t want my net cost to be so expensive, right? So if I pay $10 for the long call.

And I sell premium on top of it and I take in 2, I’m cutting my cost down by 20%. So that’s how you have to trade. But then if you’re in this environment that we’re talking about where you had this, these outsize moves, I’ll oftentimes blow right past my short leg. And that’s the frustrating part as an options trader to pick the right short leg and to figure out what your cost is versus what your risk is and everything else.

But there are things you can do. You could lower your size. For one, like I talked about the same thing with stock. You could lower your position size and create a ratio trait where then with the profits that I make from that vertical spread, I could buy a straight call option.  I could take it to the next level and buy another straight call options and have a two to one ratio.

Where one is capped to the upside and the other one can do whatever it wants. I’m just taking my profits and letting it run. And that’s Just John, just one for everybody who’s not trading options. Yeah. Initiating that spread, everybody. You’re lowering the cost to put on the trade, but you’re capping the upside.

Yeah, that’s what a vertical spread does. So basically, let’s say I have a stock that’s 100 and I pay 5 for a long call option, right? So it’s 100 stock. The underlying stock’s 100. I expect it to maybe go to 110. I expect a 10 percent move. What if it goes to 120? What I’ll, if I only have a 110 target, I might sell 110 premium against it.

So I might buy, I might spend 5 on one option and taking a 2 credit on the other option, which means my net cost is 3 instead of 5. So I’m saving money that way. And I’m managing my risk that way as well. The trade off is if it goes above one 10, I don’t make any more money,  which is a problem for some of these stocks we’re talking about.

If you, if I was trading AMD, I’d be kicking myself or that other one that you threw up the SMCI, I’d be really mad because I’d be like, wow, I I shot myself in the foot in a sense because I could have made so much more money, right? It exceeded my expectations But what you can do Is you know your vertical spread is pretty much not going to make you any more money at that point You’ve exceeded your short leg, which means you’re not you’re capped at your at your target you could just buy another call option with the profit  So the interesting thing here is we have to make sure we put the spread in context in the bigger picture.

So it’s a glorious thing right now to have this problem of bigger profit super quickly. But we also have to talk about why the spread trading is so popular in the first place, which is the probability of profit with that combination of options,  consistency versus capturing a  unusual massive short term gain.

Obviously these massive gains don’t happen as often, so you if 80% of what you do is a spread trade, which is pretty much what I do, what you’re essentially doing is you’re cutting you’re lowering your costs substantially when you do a spread trade because you’re, instead of just buying long calls in a high volatility environment, you’re going to pay a lot of money for those calls.

They’re going to be more expensive. As volume increases, premiums increase, and if you’re a buyer of an option, whether you’re long or short. You’re going to pay for that. And what’s going to happen is it’s going to increase your breakeven price and it’s going to cause you to have more losers. Your winning percentage will shrink in a situation like that.

So in order to offset that you do a vertical spread, you lower your cost by let’s say 20 percent your net cost of the trade. It also allows you to sit through volatility longer because your cost is lower. And if the stock was to let’s say lose 3 percent in one day, you wouldn’t get shaken out of the trade.

So essentially you’re creating a stop in the sense that you’ve already lowered your cost. So in some ways, if you lower your position size and do vertical spread, you’re lowering your  net cost. You’re allowing the trade to do what it needs to do. You’re letting it bounce around all over the place and you’re not getting shaken out of something.

And then when it does rally, you’ll make your money. And if it rallies past your short leg, then you can always add a call option. If your position size allows you to do that. If you’re not oversized already. Which is why it’s important when you want to be aggressive that you have that in your back pocket that you position size the right way.

Yep. So the upside is obviously you can be a little more patient, but the downside is if you have to be a little bit too patient, then you start losing money because time is now against you. Yep. Versus just holding the outright position, time is not against you. It’s really at that point trade management.

Yeah there’s plenty of other strategies I could get into. I don’t want to get into too many of them, but the diagonal spreads one, we’re using different expiration dates. If you’re expecting sideways to up where it’s going to stay sideways, then you could do something similar to the vertical where you, the short leg is a little bit shorter in time.

So it goes away and now you’re left with a long call option. So you test driving that call option. I like to call it. There’s so many things you can do. So for me, risk management is, first of all, what’s my anticipation of the market? What’s my anticipation of the stock? And then what’s volatility look like?

How much am I paying for the option that I’m buying? Like when you buy shares, you’re buying a delta of one at all times. So you’re always going to pay the same. There’s no volatility, right? When you’re buying shares, volatility is not a concern. But when you’re trading, volatility is a concern because of your position size.

So it’s a little bit of a trade off. You know what I mean? With options, you have to think of that ahead of time. You have to say what strategy am I going to use based on the volatility?  So speaking of volatility, I posted the VIX before. We’re still not really at a point where volatility is factoring into position size because the stop losses aren’t really much wider.

Yep. Bigger picture right now other than technology stocks. So just to really bring back that point that John just said, the volatility on the equity side is not really making us trade smaller for wider stop losses other than technology, which is what Brad’s bringing up here again that we spoke about before.

It is just a couple of stocks, specifically semiconductor stocks right now. The bigger picture of the market over the last week is still  neutral at best outside of the pocket.  And I don’t even know if it’s neutral. Most of it’s red, actually. Yeah. Yeah.  Yeah, I’m just looking right now. The implied volatility on some of these semi names are way higher than like the overall market.

You know what I mean? Let me just, and Nvidia hasn’t reported earnings yet. So that’s something to keep in mind. But if I go out like a month on Nvidia,  the implied volatility is 44%. Now, if I go to SPY just for comparison purposes for non option traders out there, the implied volatility. Of SPY just, to compare side by side is 11 percent  for the same expiration date.

I’m looking at the February’s so February SPY options have an 11 percent implied volatility. NVIDIA has 44, 45%. That’s, three times more or four times more. That’s what you’re dealing with. So when you are putting trades together. Keep in mind it, it could move to the downside pretty fast too.

And it’ll have that, it’ll have that profit taking day where you might get a 5 percent loss in the stock and it’ll, it might get you stopped out if you’re an equity trader. Now, the trick is to position size, be prepared for that, and then just let the rest run. And that’s the key with options.

Same kind of thing you have to do. Some sort of spread trade to stay in the game so you don’t get chopped around. But then you have to decide whether you want to maybe add to the position once it starts to rally again. So I think that’s also something to prep everybody for as well. Knowing this volatility is present here, you have to be mentally prepared that volatility works for and against you.

And if it happens to stop you out, you have to have a plan to get back in if the trade is still valid. As opposed to complaining you got stopped out and then the stock moved without you after you got stopped out. It has to be a part of your trading process if you’re an active trader. When I was talking about investing, we’re talking about you want to take advantage of it very similar to that dot com boom where the in and out and just to give everybody some context to really bring this home.

It was very common for and I’m talking more on the day trading side for this statement, but it was very common to be placing 100 to 200 trades per day.  Within that volatility, so you didn’t care if you got stopped out. You were getting back in when it made sense again Now a lot of that  just to really give some context on this a lot of that type of trading was very short term in nature and you were pretty much  just looking for  the existing trend and you were just basically trading back and forth all day, every day.

So every one of these rallies, every one of these pullbacks were basically a new move as an active trader. So the stock was in play, and especially in the dot com boom, it was long. Every pullback you were buying, every pullback you got stopped out, every breakout, like you literally, every one of these are mini trends for you to be trading that volatility.

But it was very it was very much a part of active trading when a sector or story specific volatility expands dramatically like that. Get out of your head that you think you’re going to place the one trade today and that’s going to be the end of it. That’s not what trading is in that, in the kind of volatility that we’re looking at in this.

So you literally, Tony had asked before, you’re watching the market all day. Are you kidding me? You’d be like this, glued. to the market with four bottles of water, a cup of coffee, your lunch and your breakfast right in front of you. You’re not leaving your desk unless you go into the bathroom.  Yeah, exactly.

That’s what it’s like to trade this kind of volatility.  You eat a big breakfast and then you sit and then you sit till four o’clock, right? That’s what you do. If it’s there, you got to go and get it and you can’t be, you can’t be complaining. You got stopped out on one pullback when it has so much volume, so much volatility, so much opportunity.

And you’re trying to calculate to the penny why you got stopped out. That’s not what that kind of volatility is for.  Yeah, it’s true. It’s it really depends on you. Yeah, your time frame is a real big factor. So this goes into personality too. Not everybody has the personality to day trade because they might get upset.

They get stopped out so much. That’s correct. If you view it as a cost of doing business and just part of the game and you could do that getting stopped out repeatedly and jumping back in, then you have the right personality to day trade. You know what I mean? A lot of it.

Does have to do with emotions and everything else, and you have to look at this as a business. You don’t know what the next move is going to be, but you have to prepare for the risk. And you have to, and you have to size that way and have to be prepared for it. Yeah. I remember when I first started trading and I still had the hardcover notebooks.

I don’t understand. Both legs supposed to go up. Like I didn’t have the mental model to be like, no, that’s probably going to go up. It’s not always going up because it’s a bull flag.  Yeah. You have to not worry so much about the why, you have to just Do what happened, react to what’s happening in front of you the best way you can and try to put the pieces together.

I think that if you’re day trading specifically in the morning, part of the preparation work, which, is the morning meeting, right? You sit there and everybody has their ideas and what you’re trying to do is come up with that mosaic, what is the market telling us today?

What areas are weak, what areas are strong, what happened in Asia last night, what’s going on Europe right now? What’s the story with interest rates? What’s the story with the wars that are going on? What’s going on? And then you try to put it all together and come up with a strategy of your longs and your shorts.

And then your game plan, your sizing, is today a choppy day? Is today a bullish day? Am I stepping on the gas today? Or am I going to go easy? That’s part of it too.  I think something that you just said can’t be overlooked or skip past. Is that once you have a strategy, once you have a way of looking at the market and you create your argument, you create the reasons you want to be involved in something after the market or the week opens, whether it’s day trading or you have a thesis for the week, right?

That’s what we like to do here. Here’s how the week just finished and how we looked at it, how do we trade what was available and then mapping out the next week. But especially going into the day or going into the week, once you have a strategy and you map it out, that is your best educated guess.

Why you should accept risk and what kind of profits you’re going after. If it does not unfold  perfectly, that doesn’t mean you were wrong. No. Yeah it means that it just, something changed.  Which is a problem for a lot of people. That’s why I, like a lot of people believe, what did I miss?  What did I do wrong?

Here’s what I saw. And we do that in the morning game plan. Every day we review the ideas and it’s you’re not seeing anything wrong. It just didn’t follow through.  The biggest mistakes are emotion. Letting that get to you number one, and then also not following through on winners. And holding on to losers for too long.

Those are probably the top three mistakes that you can make if you have a thesis and you make an educated guess and you look at all the criteria and you try to put together the top down analysis and figure out, okay, which sectors up, which what’s the overall market doing and so on and so forth. If halfway through the week, all those things fall apart, that’s not your fault. 

It’s it’s the world and you have to make changes.  And if you look back and you have a bad week or a bad month, you have to ask yourself, did I make any emotional mistakes? Did I double down on losers? Did I hold on to a loser for too long? Did I not hold on to a winner soon enough? Like you said, did I get stopped out and not jump back in because I was scared?

So fear and greed. Those are things that will get you.  What’s your mental model for losses, John? Let’s say you put on a good trade. You like it. Yeah. And it gets stopped out for a loss. What are you saying to yourself when that happens? Is it a good loss or was it a bad loss? 

There’s good winners and bad winners and good losers and bad losers. And this kind of goes back to what I was saying earlier about it. It was it a loss because. 

I think I lost for a second. So is it a bad loss? Like in the sense that you know, did I not do my homework? Did I get too emotional? Did I rely on a hunch? Did I listen to my neighbor? Did I do something off of my plan that Cause that loss. That’s number one. Another bad loss would be, like basically oversizing or maybe I, maybe I just went against, my overall rules.

That’s a bad loss. Okay. A good loss is I followed my plan and I got stopped out or I lost my edge in the middle of the week. Like I thought the technology sector was going to continue rallying this week. It did not, Nvidia came out with earnings and they were terrible or rolled over the whole sector.

Nothing I could do about that. Nothing. I guess that’s a good loss. Did my stop work? Did my stop? Was my stop tight enough? That’s a good loss if all that was okay, right? A good winner is if a stock reached my target and I’m happy and my whole plan worked out great did it exceed my expectations?

Was I able to make an adjustment in real time to allow for the trade to continue to run? So was I able to add another call option? Was I able to change my strategy and tweak it a little bit where maybe I was able to squeeze a little more gain out of there, right? That’s a good win. A bad win, which people don’t often realize is, was I lucky making money on a bad decision that I have a hunch and then I was just lucky, you know what I mean?

Did I do a counter trend trade with no analysis whatsoever and I caught a falling knife at the right time? Did I, did it was my timing just coincidentally perfect? You know what I mean? That’s a good win. It’s a bad win. And those wins are actually counter intuitive on my 21st birthday. I went to Atlantic City with my friends, and I won 500 on Blackjack.

When I came home, I showed my dad that I won 500. And he said, son, that is the worst freaking thing that could have happened to you. Because it was the first time I ever gambled, I was so excited. I was like, this is easy. You know what I mean? And that’s a bad win,  so I just want to, I want to throw a lesson,  highlight a lesson you just said, John.

Because I think this is really important because A lot of people struggle with the profitability side of trading over the long term, like getting profitable. And I think what, something we discuss often because it’s my own experience, which is when you learn to minimize what’s not working, you get closer to profitability because you’re not throwing that money away in the first place.

So two things that you just said that I want to highlight, and I’m going to throw a number out there. I’m going to say it’s 50 percent of the losses we experience. I don’t know if that’s the exact number, but it sure feels that way. Is. unforced errors. In other words, you’re violating your strategy of how you identify an edge.

And the second one is spur of the moment trades that have absolutely no basis other than something either got called out or something got said or something came up on an alert that you didn’t plan to trade where we have from four o’clock 9 30 the next morning, 17 and a half hours to do a little bit of work to come up with our best ideas.

versus something just happened in the last three minutes and you throw that trade out.  Reducing, eliminating, and avoiding those spur of the moment trades or unplanned trades. Are one of the quickest ways to get closer to profitability. That’s really the point that I wanted to highlight for everybody.

Yeah, absolutely. Drowning out the noise. Most, I think most of our listeners here are probably at home trading, or maybe they trade, I dunno if they trade in a group or a trading desk, but when you’re on a trading desk, it’s very easy to make that mistake. It’s very easy to trade what the buddy next to you is doing.

Or, maybe someone shouts out an idea that you didn’t see and you know he might be smarter than you, you think he’s smarter than you and you just jump on it because you think that person knows what they’re doing. Those are mistakes. Those are things that could really hurt you. You have to follow your plan.

It’s okay to get ideas from people. It’s okay to, this is why we’re in a community, but make sure you run everything through your own plan. Make sure it makes sense for you. What I’m trading might not be working for you, because what if I’m trading five semiconductor names right now in the options market, and then someone shouts out a sixth one?

That’s probably not a good idea, because I’m already loaded up in one area, it might not make sense for me to add a sixth one. So that’s what I mean. You have to run everything through your own plan. It’s really important.  So we got a nice follow through here from Ronald.

Ronald is actually one of our new members from Amsterdam. I love the fact that we can awesome do business and have members in from Amsterdam. So highlighting what we’re talking about before about volatility, put a trade on at CBNA, got stopped out, got back in for an 18 percent move in his favor.

That’s the plan for the volatility. For anybody who did not experience the dot com boom and all that kind of stuff. It was the plan that the downside of that. Not the downside of that trade, but is the volatility is amazing when you have a mental model and a strategy to take advantage of it.

I can tell you stories that from March April and May, when the market started to roll over in 2000, there were people that had millions of dollars in their trading account and they lost it in the next six months because they had no model to say the market reversed. and averaging down or buying every dip no longer was working and they kept doing it and compounding it by buying war.

And when I tell you without exaggerating, there were, there was. a room full of adults crying their eyes out, helpless waiting for the market to bail them out. And it never did. We went down for the next 2. 5 years, which is again the poster child for being able to tell direction when it’s obvious, when it’s potentially changing, when it changes and respecting risks. 

Yeah. I think a lot of people have an upward bias and that could be bad. It’s very hard to have a, have to be unbiased. It’s as far as direction of the stock market goes we all have our favorite names. We’d like to trade. We all have, mental experiences of making money.

Like that gentleman that just made 18 percent on Carvana.  He’s going to remember that, now, Carvana might not be a great thing to trade six months from now. So be careful, right? If he has that dopamine in his head from the game that he just made, remember every trade, the market doesn’t remember that you made 18 percent on Carvana yesterday.

You know what I mean? Neither, so you have to be like a blank slate of paper every day. It’s not an easy thing to do. And it’s important to to realize that the market will change. And when the market changes, you have to change your plan. You have to have a flexible plan and a strategy to to assess what’s going on.

You know what I mean? So that’s the euphoric side of making money in a stock and remembering it. We actually spent some time this week talking about revenge trading, where you lose money in a stock and you believe that the stock owes you money and you get angry at the stock and you compound the mistake or the lack of reading that stock well.

That’s the other side of it. You know what I mean? It’s it has to be, it’s very hard. We all have biases. Obviously some negative, some positive, and it’s one of the most challenging things as a trader to just realize that the stock market really has no, it doesn’t have memory. It’s not a person.

It’s not a, it’s not a human. It’s just a whole, it’s just a marketplace of buyers and sellers and it could change. Each moment in the market is unique. Whether that’s a one minute chart, an hourly chart, or a monthly chart, you have to make that argument for taking risk or accepting risk in that moment, in that unique moment that is within your trade objective. 

And for day traders, that could mostly be technical stuff or volume. But the longer out you go, the more pieces to the puzzle, whether it’s macroeconomic, earnings, whatever it happens to be, that’s a whole different foundation under the idea, which is why longer term profits can be sustained if you’re good at putting together that bigger picture.

But if the only thing you’re looking at is candles that’s the moment in time that you need to put together, which could change an hour from now. Yeah, it sure can, especially the shorter timeframes that you get into. With shorter timeframes, I would say you have to be very comfortable getting stopped out, very comfortable jumping back in, and that’s the key to success. When you’re a swing trader, the key is the right positioning and the right sizing and to be able to sit through a little bit of pain, knowing that it’s part of a pullback. There isn’t any tech, there might not be any technical damage done to a chart, but if you get a 3 percent pullback, it’s not going to feel good.

And you have to be prepared for that. Which is why it’s very important to, for that overnight risk on swing trades, it’s very important to work your way into positions versus the much shorter time frames where you can have a stop loss to the penny.  You’re not necessarily doing that on a swing trade.

If you’re a swing trader, one of the things I encourage people to do is consider hedging as a viable way to offset any overnight risk. You know what I mean? That’s one way to do it. And then position sizing, you have to, and diversification in some degrees and I know people that make money just they position trade, not individual stocks, but sectors and groups and the overall market this way.

You don’t have to worry about like single stock risk or anything like that. So that’s another way you could potentially hedge or make money. Also like with semiconductors, perfect example. You don’t know which one is necessarily going to go up or down. So SMH is a great way to get exposure to it.

And if semis were to, let’s say, pull back, SMH might be something that you could look at if it pulls into that  old area of resistance, that would be a great entry point, and that’s something to keep an eye on this way. You don’t have to worry about single stock.

Risk or earnings news or anything like that.  So it’s breaking down an options idea a little bit different from what we just talked about before talking about rolling it how do you perceive that?  Yeah. Diagonal is one of the, is one of my favorite strategies. So an alternative to entering a spread is to enter diagonal, buying your long in the money and selling.

Yeah, absolutely.  Yeah. That’s exactly what I do. Add a diagonal is one of my favorite strategies. A diagonal is great when you when you’re fairly bullish it’s a very, it’s a fairly aggressive strategy because what you’re doing is you’re expecting maybe to stop to base for a little while and then maybe make.

Some sort of a short term target, but then you maybe have a longer term target in mind. So that’s what’s great about a diagonal because that short leg does cut your cost down a little bit like we talked about but it allows your call option to continue to go  once that short leg expires and you could always verticalize it later for a second premium.

If you want to sell a second option after the first one expires, you can do that and like he said, roll it up. That’s one thing I do all the time. The only thing with the diagonal is that because it’s a more Aggressive strategy. The net trade does cost you more, right? So you have a higher potential of getting stopped out because, you have less ability to suck up volatility.

When you have a short, when you have a shorter data, a shorted dated short leg, say that three times fast . But that’s like AI search. But that’s when it comes to, that’s when it comes to strategy selection. Do I do a vertical versus diagonal? What should I do? That’s where the strategy comes in.

So I want to touch a little bit on what Brad’s saying here. I just, my, my spine just went a little bit Brad is a very deep thinker. So I just want to clear that up. Opinions scare me because opinions are very hard to change. So I just want to throw that out there as the basis of what I’m about to say.

Macro economic catalysts or  not short term trading decisions. Yeah. And we have to remember that. So CPI.  And fundamental reasons behind and specifically longer term ones and giving you an opinion, you could be 100 percent right  on your thought process behind  macro economic decisions, monetary policy, and all, and ultimately how that monetary policy factors into what the Fed’s going to do with interest rates, you could be 100 percent right,  but  we’re still trading price action.

So if you’re going to use those macro economic opinions, Okay. That has to be a much longer term trade objective. And again, let’s just put it out there. If you have macroeconomic wind behind your back, and your opinion is correct, and you’re interpreting that correct, and you have the market on your side, those are the times when that is real generational wealth.

Because You have macro policy, you have sector rotation, you have the whole market going up, and let’s just, let’s just be super clear that happened recently, and I’m not talking about 1929,  I’m talking about here, because we spent almost this entire 18 month period during what happened in the world at that time saying this is ridiculous. 

We’re in this global mess right now, and we are 54  new highs in, in, in one year. And it didn’t make sense from a macro perspective, but if you really, from a common sense perspective, I should say more but from a macro perspective, it made a lot of sense because of quantitative easing.

Yeah. So we have to be very careful. And thank you for that, Brad. I really appreciate that. We have to be very careful about mixing.  Parts of the argument for the timeframe that we’re trading 100%. A couple of things on economic data as a whole, just my two cents on it. Not one data point really necessarily matters.

Usually when it comes to an overall trend, if you’re a swing trader. You have to put together a mosaic of what’s important and when, right? Right now it’s all about interest rates, right? And inflation and employment. A couple of years ago, no one gave a damn about what the Fed was going to do.

You know why? Because rates were so darn low, right? It didn’t make a difference. You knew they were going to stay at zero and it was what it was, right? So nobody even paid attention with that meeting. So it depends what time of history you’re in number one. So certain data points will matter more during certain time, certain periods of history.

And number two, not one data point really matters because one might come out hot than the next day. One might come out cold. What you have to do is put together about 15 or 20 of them and see a trend, right? That takes time. And again, that’s only one piece of the puzzle. You also have price action.

Like you said, you have sector rotation, you have geopolitical, right? You have all kinds of stuff. We’re in an election year here, right? Which could cause volatility, but I got news for you. We’re in an election year in 50 percent of the GDP in the whole world. Did you know that 50 percent of the GDP in the entire world right now is in an election year.

So the United States is one, you have India, I think you have the Netherlands, you have South Africa, you have Indonesia, you have there’s a couple of others. There was Argentina not too long ago. So you add all that up, 50 percent of the world’s GDP is up for grabs this year in the election cycle.

So that’s a geopolitical thing you have to be aware of. Because that’s going to cause volatility this year. That’s going to cause surprises here and there. If India’s prime minister was, if the expected person to win does not win and so on and so forth, not just here in the United States, but everywhere, so that’s going to affect a lot. And these are things to be aware of. But again, it’s just one piece of the puzzle, right? That’s the most important thing when you’re looking at all these different factors, otherwise you’ll go nuts trying to like. If you focus on one data point and you can’t figure out why the market went one way versus the other that that’s recipe for insanity.

Yeah. So I want to, again, I don’t want to say Brad’s wrong about his opinion. What I want to bring to the front though, for everybody is to make sure that the reason you are you’re coloring the way you’re looking at the market matches your trade objective and you’re going to hold a stock for five days.

That, that is not a five day opinion.  Very different. He could be completely right in a bigger picture, but my point that I want to get across here, and this is really what happened to a lot of people during that period of time I just showed on the chart. Is that they didn’t think the market should be going up the way it did because of the global mess we were in and they didn’t get long.

No, it didn’t feel good too. You’re sitting at home, some people might have been physically sick, some people might’ve been out of work, some people you’re obviously stuck at home, right? It didn’t feel good to go long,  but you had to, it did for 18 months and that’s really what I’m cautioning against is you could be right.

But if it’s going up and going up and going up.  Don’t short it, obviously, because you have a different opinion, but don’t not get long either. I know I don’t want to use double negatives, but that’s what I’m questioning against, is no matter what your fundamental or macroeconomic thesis is or argument is, we still have to pay attention to price action and eventually if you’re good at making those kind of distinctions, eventually you’ll end up being right.

You still need a framework for say, now it’s happening. Yeah, absolutely. As Michael Burry with his big short last summer,  yeah, he was the big short, if you look at if you look at the history of that whole movie and that whole trade that he made on the housing market and everything else, he lost a lot of money at first.

Yeah, because he was looking at a whole bunch of data points. He was looking at economics, he was looking at he was looking at exotic dancers. I dunno if you saw the movie. He was looking at his, at exotic dancers buying zero interest in interest. Oh yeah. Zero down, mortgages and stuff like that with the cash they made from working.

And he’s like how can there be so many millionaires down here? You know what I mean? And he tried to he built the mosaic. He built a puzzle. He put together a puzzle. But sometimes it takes time to come into fruition. You could lose a lot of money now. He had deep pockets, right?

But what if you only have a couple of hundred thousand or 50, 000 in your trading account, you’re going to go broke before the thing comes to fruition. You know what I mean? So that’s something to be aware of too timing. There was a very big argument or like angry people on social media just this summer. 

like when the rally happened at the end of the year, because there was the inverted yield curve was the number one topic of conversation and that here’s the history and it leads to the market going down. And we went down during the summer, but then we had this nasty rally and everybody was still know it.

No history says inverted yield curve were going down and people were focusing on that longterm. macroeconomic history and we’re not correct in history, but missed out on the last two months of the year because they were using the historical averages and not putting that together with what was actually happening in price.

Yeah. I want to caution everybody against it still has to match the timeframe you’re trading. Yeah. 40 percent later the yield curve is still inverted and we’re up. So I just want to touch on one thing, John, that I think a lot of people might not know about, which is cool because you, we just talked about the mosaic and how many different pieces and specifically the Fed.

Let’s just, let’s just say what it is. Don’t fight the Fed. That’s the whole big thing. I don’t think a lot of people really know, like with all of the data points we could possibly be looking at and how the Fed could be influenced to do something. They only have, there’s like a mandate from Congress.

That’s only three things that they’re supposed to take care of. Everybody, there’s all these other economic data that became important with social media and every, talking head out there needing something to talk about 830 in the morning. But the mandate for the Fed is since night, then this literally came from Congress.

Yep. Maximum employment. Okay, so watch that number when it comes out and the trend in their prices, stable prices, right? CPI, PCE and interest rates out of all the economic news we could be taking. And again, Brad just talked about CPI before out of every economic number that comes out. That’s literally what the Fed is focused on those three things.

That’s from Congress. That’s not from my opinion, that’s literally what their job is. And so the market reacts a certain way that you don’t expect because it always goes back to the Fed. What is the Fed going to do? In that context, that’s the point I’m trying to get across to everybody. 

Exactly. So that’s cool. So how about we throw some ideas out there, John? What are you looking at for for let’s say heading into next week?

On the long side like I do, and again, I’m going to position myself where we might get a pullback only because the basing and stuff like that was only about a month.

And like I said, I think.  I’m bullish, but I think, on any pullback, I’m going to be a buyer. That’s for sure. But I’m looking right now on more than the financial sector for now, because I think that’s where the pullback already happened. Some of these banking names. So take a look at bank of America for one BAC.

It had a really sharp pullback. So this might not be one that you’re really, that people might not be too keen on. Cause it had a really steep pullback after earnings, but it did turn around. So again, not expecting. I’m not going to expect too much from something like this. I might just expect it to get to that previous area of resistance.

You know what I mean? So again, vertical spread, something where I’m going long, the at the money call option where it’s currently trading, giving myself maybe out until March or maybe, late February and just targeting that upper area. And I could do a diagonal, like the gentleman mentioned, I could do something where I go out to March on my call and then maybe sell some favorite February premium against it.

No that’s one. Goldman Sachs looks pretty similar. The chart on Goldman Sachs looks better. Actually. This is more of a base, right? It didn’t really pull back as sharply. So that is one we actually call that holding the bid. So for those of you that happen to be new there, there’s all kinds of pauses or pullbacks.

You have a pushup and a pullback, which is still healthy, but a pushup and sideways, they’re holding the bid, meaning that there’s still a bid under the market.  With demand, not allowing it to go down. And that’s generally healthier. Yeah, it had this massive move right back whenever that was November, right?

Massive. And then all of a sudden it based and then I guess with earnings, it did go a little lower. It put in a little bit of a flag pattern. So it does have a little bit of overhead resistance there. So again, not looking to do a straight call on something like this would be again in the category of a vertical diagonal situation where I’m going to be doing some sort of spread trade.

Going long the at the money calls, maybe out 30 to 60 days and selling premium against it out maybe two weeks to a month, something like that. Another side of your all time highs. How many times have we said that in the last week or so? Now, when people ask, I know you probably get this question a lot too, Pete, like what do we do when something’s an all time high?

What should our target be? You could look at ATR. You could look at Fibonacci, right? Fibonacci retracements. If you’re for the few fibbo fans out there. But yeah I liked, I like to use ATR and I like to let the chart tell me like, what’s the trajectory of the stock. I try to come up with the best educated target I could find when something’s at an all time high.

But I’m not afraid to trade something at an all time high. Like I used to be like, 15 years ago, I’d want to, because when you’re younger and more naive, you want to short everything that goes at an all time high. But that’s not what we’re going to do. You want to follow trend, obviously.

So I actually like Goldman a little bit better than Bank of America in the sense the price action is a little more stable.

JP Morgan, you mentioned also is these just the big banks, the big, pick any one of them really did fairly well. JP, I don’t like that weird looking candle it put in on earnings there, but again, it could potentially try to take that out, so that’s something I’m looking at on the long side now also healthcare. Switching gears here for a second. I did a little bit of a scan earlier. Check out BHVN. Never heard of it. Never traded it. Don’t know it, but it showed up on my scan. BHVN. 

Now this did a textbook pullback. Look at how beautiful that pullback is. It confirmed on Friday that it’s did what it had to do. So I would, if it follows through on Monday, that’s something I would get into on a diagonal as well. I would look to, at the money calls.

And then again, that last area of resistance, maybe sell some premium out a week or two there, but going out on my long call about 60 days or so. Bullishing coffee candles can be a very powerful reversal. When you take out both sides of the previous candle, you get early short sellers here getting caught because this candle broke below the previous day’s low, which It’s For the most part is everybody sell stop or stop area.

When you take that out and reverse to the other side and actually close strong and take out the previous day’s high. Now you actually have short sellers that are wrong that need to cover, probably have their stop loss at the previous day’s high as well. New buyers entering a position for the first time at that same high.

Now you have two different groups of people looking to buy. So you have, you actually have double the amount of buying pressure and you tend to get some good follow through on a engulfing candle like that, especially if it closes near the high like that. Exactly. So something like this they only offer monthlies.

I’m looking at my screen right now. So I would probably go out to March 15th.  And then maybe sell February 16th premium against that’s 27 days. That’s a long time. So it might be, this might be tough to do a diagonal on something like this. You might have to stick with a vertical on something like this.

So just to keep that in mind. Also on the healthcare side, then I’m going to give you a short one next.

Now it’s not too late to get into Jeffrey’s. I put  Jeffrey’s in the chat last week. It did pull back and it bounced back again a second time. So you might get a second crack at that.

That looks okay. So it like a little bit of a bull flag there.

And then finally, on the long side, I’m looking at, take a look at DOCS, D O C S. This one’s not as, my favorite one is BHVN, the one I just showed you. But DOCS is in a bit of an early stage uptrend. It’s, it obviously, it filled that gap nicely.

So that if it gets a little bit further, we’ll see what happens there, but I think earnings are coming up So again, I didn’t check earnings on any of these so be careful I know on the financials like goldman jp morgan earnings have passed. So those are like safe to trade Docs is february 8 Yeah.

So just be careful. Same thing with BHVN. I didn’t check either. So just be careful.

When you’re putting your position sizing together now on the short side, remember I talked about the barbell that we have going on right now.

So I’m going to avoid energy a little bit only because of the geopolitical, you might have some supply issues going on with the red sea and everything else.

So like it might cause oil actually to spike. You might get a little bit of a geopolitical thing where, the supply gets disrupted and the price, spikes on you. So just, you got to be careful with with energy and oil, not to say not to short it. I wouldn’t go long at that’s for sure right now.

But I like basic materials because that’s clearly a sector that. That’s a short sale you mean? Yeah. On the short side, because the basic materials as a whole, just completely rolled over. Take a look at Agnico Eagle is a gold miner. So take a look at that first. AEM completely fell apart there.

It’s a low base, right? It cannot, doesn’t seem like it even wants to try to test any moving averages there. It just completely, that, that could roll down pretty hard still. And then one, two, three, four bearish gaps. Yeah. Nasty. Really nasty stuff.

And then steel STLD. 

This actually was in this amazing uptrend for so long. And now it just looking nasty. Again, it’s at support. So maybe see if it breaks a little bit.

And then ZB let me see what else LYB  on the short side.  Again, it just seems to not want to go up, and again now here’s the thing with trades like this because the market’s bullish, right?

As an options trader, what I might do is not necessarily go short where I’m buying a put option, right? Or going short the stock, but I might do something of a credit spread where I would potentially profit if the stock just does nothing. So I might put together more sideways strategy for something like this, where I just think it’s going to stay where it is.

So there’s a relative weakness to the market, maybe not necessarily a straight up short sale. So to do a credit spread, I would sell a call option, right? That’s a short position. But I would, but to protect myself, so I’m not naked I would buy a call out of the money on top of it. So that, so my risk is basically in between those strike prices.

And my reward would be the premium that I receive.  So obviously a big thing heading into next week is on the market itself is, the breakout level that’s been stuck in this box. We’ve got good volume on the breakout, exactly what we wanted it to be. So getting back to what we were talking about before, about conditions changing, we have to be going into next week and saying, I don’t want the SPY to get back into that box.

That has to affect position sizing and anticipating profit targets. If we’ve had this amazing breakout on volume and come right back into this box.  Nothing’s changed yet. If it’s only one day now, we did get good volume. We did close near the high. We did get a bullish gap two days in a row and we stayed out of there, but we have to at least be having our mind.

What don’t I want to see it? What does that mean for how I’m going to protect? What I don’t have open and, or what does that mean for new positions? We also talked about market breath, which the entire market right now is not joining what we’re seeing in the tech sector. At least it hasn’t for the last week.

This is the last month, a little bit better, but the last week is all concentrated over here.

So very similar to when we were talking about the magnificent seven.  Let’s say 10 weeks ago when we were going straight up the question was whether or not market breath would catch up. And at that point it actually did. 

We’re not seeing that yet. So if the market breath does not get better and tech  Kind of falters a little bit after this monster move without any new additional news. That’s going to change the situation So again, these aren’t complicated things It’s just spending that extra five minutes and saying how aggressive and aggressive in air quotes How aggressive should I be right now?

And how do I know the answer to that? So right now that’s a very easy way to look at it  how much of the markets on the same page and right now most of it is technology and if we go a step further a which is this map right here. It’s a breakdown of stocks that meet stacked bullish order flow over the last week and closed at least 2 percent positive over the last five days. 

Half of the map is tech. So number one, you got to be aware on the fact that tech is carrying the market. And if institutional attention is on tech right now, you better have your attention on tech right now because that’s where money, that’s where order flow is flowing. The other part of that is if that picture of tech starts to change and the market fails,  That doesn’t mean we should trade the same way.

This is our thesis on,  now, before the market opens. So if that thesis hangs on and stays the same, great. Nothing changed, let’s continue to do what we’re doing. If it doesn’t, what we like to say in the community is, here’s perfect, and that’s, there’s a certain amount of conviction when you see perfect. But then as soon as you start moving away from perfect, that has to change your conviction level, and it has to change how much you’re willing to put into the trade.

So right now we’re here and we just need to make distinctions in tech and the breakouts that we saw last week. If they stay there, great. We’re still up here looking for optimal entries. But as soon as that, if that starts to change, we have to change with it. And I think that’s a big challenge for newer traders is they don’t understand that after they come up with that argument, price action still unfolding.

And we have to pay attention to it changing or staying the same. And that’s going to ultimately affect how we’re continuing to trade after that. Thank you again. Get on the road wide open. Step on the gas, get on the road, wide open the cars in front of you, do something different, something changed. We have to do something different because we’re paying attention.

We’re not predicting. They’re not going to predict the car in front of us is going to stop. They’re slowing down right now. That’s what we have to make sure we’re paying attention to. Yeah, that box that you drew is very important. I think that for the SPY there. It all goes back to the yeah, but, you have some sectors that did not participate.

That basing did not last for too long, about a month or so. The probability of attesting that box is fairly high. So that’s just something to be aware of. As you position yourself going into the week. 

So we do have a couple of other ideas this week on the bullish side of things.

Amazon is still hanging on there. And just continues to peck away at this breakout level and obviously rallied with the rest of the market. What I like about some of these ideas, when you zoom out, you can see the next levels. It’s 170 and then towards 190. So we have 120, 120 increments. 

So roughly 15 and then ultimately another 15 beyond that. So I’m looking at Amazon, excuse me, heading into the week.

3M, which has been pretty strong, traded into like we were just talking about a pretty big reversal candle and a bullish engulfing candle. It actually took out the previous.

two days low and the previous two day high and did so in pretty good volume. Now, we do have earnings coming up, so you’ve got to be aware of that coming out on the 23rd on Tuesday. But this is going to be one that I’m  looking at to see if this reversal ends up ultimately getting it through this 109 110 level.

So I actually have an alert set for 110 heading into earnings. I’m not looking to trade it before that because it’s too close. And you can see the stock is going sideways, but I can’t ignore this. And the relative strength that this stock has in the industry, a lot of the other Caterpillar and obviously Boeing and a couple of other ones pulled back pretty big.

So 3M after earnings through 110, I have the alert, but General Electric heading into heading into this as well.

And again, you got to know when your earnings are coming out, we can’t trade in a vacuum, so it looks like industrials.  are coming out on  Tuesday.

Home Depot is another one that I like. After basing here, bullish gap here, basing for a week and breaking out.

I love that follow through. I love the potential. I love the fact that some profit taking at the end of last year, but came right back in and caught a bid. Two, and two other ideas in financials. American Express. pretty deep pullback, three day pause, rallied again, and Capital One as well very similar price action.

And both of those, because they have some resistance above, I would kind of term these what we usually call a two step trade, where you can justify the bias, justify an initial entry. But has better reward potential after this most recent resistance. So if you’re planning out putting a piece on here with adding aggressively up here with room to go on both of those on both of those ideas.

American Express has earnings on Friday, so you could potentially Have a little momentum going into Friday as well. So if you want to trade before earnings, that’s okay too. So trading around earning is always a question we get a lot. And I think that the, I never, I don’t, I try to tell people you don’t want to, I don’t want to say never trade earnings.

But what you want to do is just understand your reward to risk, understand what your risk is, what your overall potential risk could be versus what you’re targeting and what your reward might be. That’s the most important part when. Just making that decision, we actually have a strategy that we use in the community for what after earnings come out.

It’s a very easy way of identifying risk reward and the catalyst. We either get tremendous follow through as soon as it happens or we take a small loss. I’ll take that  all day. I do have a couple on the short side just in case and most of them are on the energy side. Like you said, John they’re all flirting right at these breakdown levels and have room to go.

Exxon finally broke through 100 and pausing through that level. Chevron, which we had accumulation in over here heavy volume breakout, but the whole.  sector basically dragged it down. And now we’re actually pausing right at the support level. You zoom out where the next significant level is over here.

It’s roughly 15 to the downside. If we do finally get this  moved to the downside, we finally get out of this choppy mess. Although, like you said before, crude has got this massive support at 67.

Oh, actually, good call here Brad. That’s literally the next idea that I was going to call out on the short side.

ENPH absolutely relative weakness to the overall market right now. A couple of bearish gaps over here and basically a three day pause. I got some minor resistance over here, but then after that, we’re looking all the way down here at 74 and change. That’s enough, that’s 25 percent potential if it could take out this short term support over here.

Brad and I are seeing that exactly.  Technical term for that shot right there. It’s called the March of Death.  The sun is not setting on this solar stock right now. Or maybe it is. The sun is setting on the solar stock. So that is a slow death march right there.  Hopping back over a little bit into two ideas.

Walmart after getting clobbered after hitting all time highs in a pretty solid stacked order flow, it just keeps making higher highs, higher lows, pull back a little bit. here, but heading back towards all time highs could be a trade to be mapping out. It’s not a monster move, but the stock really doesn’t have tremendous volatility one to actually in health care that I want.

I want to bring up because the health care obviously cooled off a little bit.  If we take a look at health care in the context of what it was doing compared to where it’s been the last few days. So this is actually a pullback, but there’s a couple on my list heading into next week. Merck is actually holding up pretty cleanly here.

Again, getting back to what you said before about Goldman holding the bid and being a healthy base. That’s a nice chart. Yeah. So I really like Merck heading into next week and AbbVie also breaking out relative to what some of the other stocks have been doing in that sector. And you can see how we’ve pretty much been mapping it out for the last See look at that, you see that rally that it had a while back?

The original rally from its low, that one right there, see that base right there? It was basing for all that time, and now if you if you saw the chart back then, if you just ignore what happened after that, right? That looks like it can’t get any, like psychologically, that’s a hard trade sometimes for new trader to take right after that massive rally like that.

And you’re like, wow, like I don’t think it go much further. And then sure enough, look what happened.  It’s one of those things where, you know, those, I like charts like Merck looks like that now, and that’s, that’s cool. So I think the drag on the bigger picture in healthcare have been some of the like you mana.

Yeah, you and a club clobbered a little bit there. And you and age, both of them, obviously two of the larger cap stocks in in that group getting hit and pulling it down a little bit. We still have a trade in Johnson and Johnson from last week. It’s still just chopping around, but I don’t really have any reason to get out of it yet.

It still has some decent room to go that we have to stop down in this area right now. This is a really classic example of. It might not be moving in my favor, but it’s not moving against me either. There’s, from a banking perspective. Earnings on Tuesday  on that one. That looks like it’s in the morning.

Tuesday morning, that little thing there.  So that’s pretty much what I’ve got heading into next week. Maybe a couple of reversal plays we’re looking for. Dollar General hanging out. It’s got some room to go to the gap fill over here. And even DLTR, Dollar Tree, pulled back a little bit but this uptrend is really what I’m looking for.

If we just go out to some simple moving averages, it’s still above the 50. That’s generally the last kind of place I’d consider looking for something. The reason I’m looking at it is this is still pretty much in place and earnings are already out. So if it fails on this one, I’ll end up leaving it alone, but this is digging down into the barrel.

The last one which has been really good, DXCM.  This trend has been amazing and it’s been basing a little bit here again, like a lot of these has earnings coming out, but  DXCM, it’s got another couple of weeks for earning. So this could be a trade for about 10, 15 bucks, depending on if we follow through here again. 

Yeah, that chart looks good.  And the momentum stock of the year, Uber I don’t know how this thing just picked up the way it did, but I do the, I think this is now 10 days in a row of closing above the open. Which shows good relative strength from a bigger picture perspective. And we also are taking out all time highs again.

So 10 days in a row, green into all time highs also has my attention. That’s a slower mover, but definitely something I’ll be watching. As the week unfolds, there’s a lot of stuff to watch. Just always watch earnings. Be careful is what I tell people, I don’t know where they’re coming out. 

Always earnings whispers. com. Make it your best friend. During this, during the season, make sure that you have that up on your screen just to take a peek at when earnings are so you know when they’re coming. So mapping out economic data to John heading into next week. Prudent.

So nothing Monday and Tuesday. So Monday and Tuesday, quote unquote, should be pretty  pretty, I don’t want to say easy days to trade because that’s throwing it out of whack, but there’s no economic data that’s really going to knock you for a loop Monday or Tuesday. Then as we start getting more into the economic data on Thursday morning, and as we just said before, the Fed does look at PCE, personal consumption expenditures.

Just be aware Thursday and Friday, a little bit more. Economic data that could create some short term volatility, not necessarily turn the market around, but short term volatility that we need to be aware of. Yeah, we have GDP on Thursday, which is the first one for the for this year. So that’s going to be something people look at as well.

But yeah, these are things that you always have to be aware of. And like we said earlier, not one data point matters, but it could be market moving for those. That amount of time that you were, that you’re there, in the trade.  So basic materials, pulling back energy is bearish also, but pulling into support.

Crude oil has a big support there. Obviously a big focus on technology. We gave a rundown on those particular ideas as well. Actually, you know what? One, I want to just highlight the homebuilders. Residential construction actually are still in play, even though they’re wonky lately, last week and a half.

But they’re also still near all time highs. So we’ve been actually watching this group for a while and they trend very well when they do move and they move well as a group. And they’re not that far from all time highs again. So I actually have an alert here in Lenar and some of these other ones Toll Brothers, Pulte Homes, KBH.

And DHI all up in this one area all together. They move very well together. So I have an alert for Kate and Lenore. I’m not trading it between here and there. When something gets up there, it fails five different times. I’m not going to, I’m not going to put on a trade in front of that. But if price discovery finally does get through there I’ll absolutely want to participate.

Because finally, when the fires get in, they’ll punch it through there again, awesome stuff.  That’s what I got.  That’s what I got. All right, everybody. A lot to review. We’ll send out the replay to everybody as well. Have an awesome weekend, John. Everybody in the community have an awesome weekend. Thank you so much for your time.

And John again, obviously, thank you so much for your time as well. It’s my pleasure, Pete. And have a wonderful weekend, everybody. Have a great day, everybody. Bye bye. Take care. 

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