XLF trade ideas
THE WEEK AHEAD: WFC, C, JPM, BAC EARNINGS; XLF, IWM, XLU; /CLEARNINGS:
And ... we're back into earnings season, which ordinarily kicks off with a bunch of financials. Generally, I don't play these for volatility contraction, since they don't get all that frisky generally, but this environment is a tad different from quarters past, with the 30-day in WFC (45/76), C (44/91), JPM (41/63), and BAC (40/70) all greater than 50% and with the sector exchange-traded fund up there as well (XLF (47/58)).
Rather than play one of the single names, I've pondered what could be done in the sector exchange-traded fund, XLF, instead. Pictured here is a long-dated XLF call diagonal with the back month at the 90 delta in June of next year, the 30 delta-ish front month in June of this one. Ordinarily, I don't go that far out in time with the back month, but June '21 happens to one of the expiries with the lowest implied, so it will be one in which the 90 delta has a lower extrinsic value baked into it compared to expiries of shorter duration. Costing 8.36 at the mid price, it has a break even of 23.36 versus 23.38 spot, a debit paid/spread width ratio of .76, and delta/theta metrics of 58.64/.77, so it's neutral to bullish assumption with plenty of time to reduce cost basis via short call roll. You'd be paying 8.36 for an 11-wide, so have a max profit potential equal to the width of the spread (11.00) and what you paid (8.36) or 2.64 ($264) -- about 31.6% return on capital, assuming max profit.
Naturally, it would have been more awesome were one to have gotten in at the 3/22 17.50 lows.
EXCHANGE-TRADED FUNDS WITH 30-DAY IMPLIED GREATER THAN 50%:
XLU (52/52)
XLE (47/75)
SMH (43/57)
GDXJ (41/81)
EWZ (40/74)
EWW (39/58)
SLV (34/50)
XOP (33/100)
USO (32/128)
GDX (28/62)
BROAD MARKET:
IWM (53/54)
TQQQ (47/122)
QQQ (40/42)
SPY (40/41)
EEM (35/40)
EFA (31/35)
FUTURES:
/NG (78/73)
/ZW (69/36)
/GC (41/31)
/ES (40/42)
/SI (34/48)
/CL (32/1555)
/ZC (29/32)
/ZS (21/20)
I reference /CL in the header, primarily due to the background implied, but also due to price action. Some of the volatility may piss out at futures open given a supposed agreement by OPEC+ to cut production by 10 million bpd or so, with the last holdout -- Mexico -- coming on board. If we revist $20/bbl., I will consider adding /CL out-of-the-money short puts.
VIX/VIX DERIVATIVES:
What's new ... . We're in a high volatility environment and in backwardation with VIX finishing the week at 41.67.
MUSINGS:
In The IRA: Things aren't looking all that great for me from an acquisition standpoint with the short put ladders I stuck out there for things on my shopping list -- at least for the April "rung" of them. That's okay, since if they expire worthless, I'll keep the premium associated with that rung. Naturally, if I don't pick up jack via assignment, I'll look at re-upping with a rung to replace the expiring worthless if that happens or just let the remaining rungs ride and look for opportunities going forward. A lot can happen in a week ... .
XLF to Long, in Uptrend , Triangle consolidationCondition:
1. Downtrend line was broken by breakaway Gap (G1).
Start a new trend.
2. Weekly demand zone confirmed. (07/01/2016)
3. Triangle consolidation, near the uptrend line.
Entry in side Triangle: below 21;
or buy at next open if Gap breaks the Triangle downtrend line (G2)
Stop: 20.5
Target1: 24; risk/reward=1:6
Target2: 25; risk/reward=1:8
This is a trading school homework. I need 6 months to practice trading plan.
If you like it, thank you for your support. Please use SIM/Demo account to try it, until my trading plans get high winning rate.
Bear Flag Building in FinancialsLooks like a pretty clear bear flag in XLF. Financials have lagged the broader market on this bounce and I'd expect them to break down first. Should be a fantastic short opportunity.
Banks are drowning, bailout needed!US is swirling in a mountain of debts and with QE4 , they are printing more money to help shore up the failing industries, tourism, hospitality, oil, banks, airlines, etc. The debts mountain are getting higher and higher, breaking its previous peak year after year. And this is definitely not good in the long run when the bubble breaks!
Here, we compare the XLF ETF . Click on the Holdings and you can see the top 10 holdings which shows the list of financial institutions.
I expect more room to go down towards the support zone at 14.98 to 17.31 where it probably might have a pullback. Thereafter, we have to assess the situation and see if price action supports and heads higher or continue to go down.
Here, we see the legendary Warren Buffett spending 2.2 billion to buy back Berkshire shares in 2019. See, even someone of his level does not time the market as the price of Berkshire continues to go lower (meaning his 2.2billion purchase would incur a paper loss). But important lesson is he is buying them much cheaper though he does not know when it is going to bottom.
So, Citigroup and other banks are still a sell for me , for now.
XLF looks relatively betterI think it will bounce higher than other sectors. Just wait for timing. Current situation can not chase high.
XLF at key level - watch for bounce?XLF (Financials ETF) at a key level around 23.....long term trendline from 2011 (note RSI also at lows last seen 2011) and also within 4% of the Dec 2018 spike low support.
With the FED expected to slash and burn rates next week the worst of the decline for banks etc may be "in the price" and may see a bounce (short term) at least
XLF Financials Next movesFinancials yesterday did very well and rallied almost 6% by end of the day. While XLF is near a support level and has bounced off of its Monday lows, in order for a meaningful move higher, i feel that it needs to consolidate and build momentum. See example in yellow box back in Aug 2019, where it consolidated to pushed higher after a ~10% fall.
I'd like to see the VI get above its 24 moving avg, and RSI diverge higher as price moves sideways. In times of down turns as severe as this, while we may at times get snap back both up and down with little reason or cause, in order for one to be fully committed to either side, we need to see evidence of consolidation, and not just guess that one day it will chop higher and next day it will chop lower. Cheers.
The Great Bear AssaultSeems like only a fortnight ago when I wrote about the `Great Plains Battle` and how the bulls had to either emerge victorious there or surrender. The bears did not give *any* ground. Today, it is clear that they have nearly ousted the bulls from the plains and, in fact, are now taking the battle to the heart of bull territory (green rectangle). I definitely expect a ferocious battle to take place there, even with the Phoenix (VIX) now at historic strength.
That said, if the bulls fail to protect their home base, then who knows how far this market may fall...
I hope those who follow me have at least protected your wealth. The drop is happening many folds faster than even I expected, as you can see in my unmodified chart. Please trade safe and good luck!
Banks can't make money like this, look at Europe to see how badThe foundational problem here is that globally there is no growth story that does not involve assistance from central banks, which has been clear for a few years now. Regardless it has been great to be in stocks but, at the end of last year signs of the US consumer slacking off started to crop up. The first signs were in durable goods after that, transports fell off a cliff. Inflation has been with us for years but they measure it incorrectly by taking a bunch of products made in china, like TVs and clothing which mask the reality of the fact that everything involving real estate (rent, food...) has been inflationary. Everything involving human services has also been inflationary (health care, education, construction costs.) While everyone celebrates low unemployment rates, they are very inflationary. Try getting someone to build or fix anything without paying a fortune and it becomes clear.
The Yen as a flight to safety currency has been absolute BS for years now but that trade would not die, it has been with us since the 80s, if anyone cared about fundamentals it should have broken with the onset of Abenomics. The yen VIX ratio just broke down. Then gold surged against the Yen, XAUJPY blasting past all-time highs.
Nobody seems to care about this problem in Japan but what it means is that the Nikkei is about to get rekt. The only thing that has held that market up for many years now has been the reversal of the yen carry trade and people buying shitty Japanese stocks every time the trade reverses. They are about to get a margin call on a mass scale. How much money do the Japanese have in the S&P 500, they will be forced to dump right at the worst of the volatility spike. That SPX chart will be a sight to behold.
The next piece that you need for mass inflation is a disruption of the supply of goods, enter in Trump trade wars and tariffs...
Everyone who thinks this is all about the coronavirus will be very confused when they see what comes next, they will talk about what BS the reaction of markets is and, and ...
I thought that the story was going to unfold gradually over the next year, then the bigger disruption of the supply of goods started to kick in with china shutting down. This is almost certainly not long-lasting but it is a trigger event and the nail in the coffin is the drop in rates and yields.
Here is the problem, the markets will probably continue to correct for 6 more weeks or so. If it is fast and not gradual gold will get hammered short term with all the margin calls on everything else. Bonds and cash is where it's at for the correction. That being said I would not short gold at any time, this is not going to be a liquidity crisis like 2008 but people will look at that chart and dump gold assuming that it is going to do the same thing, they will pile on the shorts and drive gold to all-time highs when the short squeeze happens. After the big correction, it will be metals TIPS and gold miners.
Gold miners will correct at first but then enter a bull market. They are already making record-high profits because the cost of production is at the lows due to the valuation of oil and the local currencies where they operate vs. the USD.
The low the GDX just hit will likely be retested in an SPX crash, maybe lower. After that, they will remain among the few who's profits are growing. There will probably be a bubble in the GDX after the initial correction.
One could go on and on with arguments for metals (election year, CBs, Europe...)
XLF Financials also laggingThis one surprises me a bit, mortgage rates lowest ever, there will be tons of loans that will be refinanced.
Charts seem to indicate it's headed towards the next support though.... we'll see.
Who shall win the Great Plains Battle?Within a week of taking control of the Great Financial Wall, bears drove the bulls far into plains territory where a riveting battle has ensued. I have to show some respect and commend the bulls who have stood their ground the past few days despite having lost the protection of the wall and being ravaged non-stop by the bears and fire of the Phoenix (VIX). However, I must warn that if the bulls lose this battle as well, then it would no longer be bravery but nearly suicide to try and press on. The next evolutionary stage of the Phoenix is of such power it may not have been seen for over 90 years, a fire that could obliterate everything within days. Also, today, the Great Wizard (central banks) fired a spell that worked many times to empower the bulls (rate cut), but it utterly backfired.
In light of the coronavirus and today's FED failure, I now see the possibility that the bull market is finished, so I added a new potential trend line down to XLF sub 12 by 2021.
Please stay safe and good luck, friends!
XLF - Fed rate cutThe obvious beneficiary of a rate cut is financials. I thought about XLF calls Friday afternoon but bailed because I didn't know why the market rallied. Silly me, of course it's the Fed. SHould have known since they burned me in 2008.
Expect XLF to rally into teh Fed meeting in March.
Also, way oversold like everything else, lol.
$XLF Oversold but still showing weakness Bounce to 28 then dropOversold indicators, closed below Oct bottom , long-term weakness identified maybe due to more cutting of interest rates but now expecting bounce to 0.62 fib then falling again (+10%) or can be extended to 1.32% fib then drop but its not unlikely
Bears have full control of The Great Financial WallWell, well, folks, for those who have been following my narrative about The Great Financial Wall (GFW), it shall be told now that, after months of battle, the bears today took full control of the GFW. With much pain, they thwarted the final stealth bull attack (ie. repo injections) which almost allowed the bulls to reach the other side of the wall.
However, as it stands today, the greatest bears who have withstood years of loss and humiliation are now standing atop a solid defensive structure and an array of arsenals at their disposal. Now they await the arrival of their brothers and sisters to begin the march into the corrupted heart of the market to finally clean it out and bring the economy back to reality.
No doubt, there will be many battles to be fought as the bulls still have strength south of the wall. However, the bears have gained the most important ally, the Phoenix of fire (VIX), whilst the magician of the bulls (central banks) have perhaps one more trick up their sleeves. Unfortunately, they wasted all their ammo jacking up the market instead of actually saving the economy.
Good luck to all! To my friends who do not know how to play a bear market, please stay in safe assets. To my bear brethren, stay strong and watch out for the short squeezes which will inevitably come!
Will the bulls breach the great wall of resistance?This week's market movement has been baffling. The bears were on the verge of striking the bulls down from the great wall of resistance, when they suddenly returned, with great stealth and silence in the wee hours of the night, to retake a central place on the wall.
Have they succeeded in using guile and deception to defeat the bears once and for all? I think it is possible. If the wall of resistance is completely broken above, then this fantastic wave iii of 3 rally that bullish dreamers have been talking about for years could become reality.
However, I continue to favour the bears. When I observe this chart, the gaps all the way up tell me that bulls have been using deception and manipulative (under the table) techniques to climb the great wall (since way back in the Fall). Once the deception is exposed, the bears, who stand together in strength, should perhaps stand a chance at victory.
If it is these underdogs who win, the defeat for the bulls will likely be beyond shocking, as their ranks are ripped out from beneath their feet, thrown back into the gaps from which they climbed, and the (VIX) Phoenix rises to even greater heights to breathe its fire on these scattered few who choose to remain.
Good luck trading this wild beast of a market, friends.
