Courtesy of David at All About Trends
Let’s look at an issue that is starting to garner a lot of attention in fibonacci land as well as Technical Analysis land. And that is the USD – US Dollar.
61.8% isn’t that far away.
What’s so special about 1140 on the S&P 500?
It’s the 61.8 Fibonacci Level off the April Highs through the July Lows.
See those green circles? While the index consolidates sideways it is working off the full stoh’s from overbought to oversold. This means we could be setting up for a push on the jobs report. And when you couple that with the US Dollar needing a little more downside umph potentially to tag the 61.8 Fibonacci level, we are just one news driven pop away from being done here.
The key will not be the report, but the reaction to the report. The best gauge to watch is the My Maria indicator on CNBC. If she is full of glee because of a gap up open then it’s all you need to know to fade that gap. For us? We would consider two plays that are talked about below.
As you can see in the chart above the Dow Industrials is struggling here. While on the subject of the Dow take a look at two names that are components of the Dow — IBM and CAT.
Support and Resistance are clearly defined in the chart above. You can also see we are closer to resistance than we are support.
What you’ll also notice in the chart notes are a little extra today in the form of an options situation for you all to watch. Recently we talked about one particular way to look at options and that was in the money and trying to not pay for time in a BASIC sense without getting too advanced for those of you trying to increase your knowledge of these instruments.
So let’s say the stock goes nowhere on the jobs report. Let’s say we get the report out of the way and the market finally pulls back. Let’s also say this issue pulls back to the 50 day at basically 128. From 131.25 to 128 is 3.25 points. So theoretically your option ought to go up 3 points right? Maybe, but you paid one point for time so they will suck either all of that out of you or a good part of it. So let’s just say they suck it all out of you. Still that’s 2.25 points and on ONE CONTRACT (one contract controls 100 shares of stock) it’s a gain of 23%. While that’s not earth shattering, it’s not bad for a stable household name.
Still 23% is 23% . What if the stock bolts higher? Well the value of the put options goes down, simple as that. What if the stock bolts 3 points higher? The value of put option for the most part will go down about the same not taking into effect the time value which in this case some of it will stay. So you’d be down about 23% give or take as a rough guestimate. Again we are just laying out the basics and groundwork here educationally speaking.
Now let’s look at CAT below.
Here too it is at a resistance level going into a news driven event and is overbought. Same deal here as with IBM above. In this case say the stock falls 3 points? Well your option ought to go up the 3 points minus the time value you paid (45 cents) or about 2.55 for a roughly a 29% pop. Here too, it’s not earth shattering but hey if it works and the market is the boss wants to roll the market over for a healthy pullback 29% is 29% in this example.
If the stock goes higher? Same deal as with IBM option, it goes lower. Remember the percent moves are larger here in the world of options HOWEVER that goes both ways. For those familiar with options, remember each contract is the equivalant of 100 shares of stock so keep it SMALL and above all do not ever bite off more than you can chew.
For our portfolio purposes we will consider shorting each of these above stocks should we get a news driven pop or these stocks break their pink lines to the downside. Watch for trade trigger alerts.
Sorry we forgot to add the pink line to IBM but you all get the picture.
Remember this is a basic conversation on in the money options with stocks that are trading off of support and resistance levels.
To learn more, sign up for our free newsletter and receive our free report — “How To Outperform 90% Of Wall Street With Just $500 A Week.” David’s offering our readers a Special, two months at $10 a month. – Ilene
