US Home Construction in Correction Mode

iShares Dow Jones U.S. Home Construction (ITB) lost the daily 100MA last week and backtested from below yesterday. That backtest was rejected and ITB, which had lost 10.5% since it’s April 6 high, could lose another 5% to 17%.  [Read more…]

3M Co (MMM) Bearish, Could Lead Broader Market Pullback

3M Company (MMM) is hanging to what I think is very crucial support and should this support collapse it could pull the company back -8%. MMM is correlated very close with the broader market so if a pullback is imminent I expect MMM to lead the way.  [Read more…]

Bullish Energy Using ERX (Direxion Daily Energy Bull 3x Shares) and UCO (ProShares Ultra DJ-UBS Crude Oil)

Energy performance in the market has been turning back up as we’ve seen in numerous oil plays along with rising crude prices. These plays provide excellent entry points provided we can clear the recent resistance hurdles. I’ll highlight two ETF’s in paritcular I’ll be looking for swing trades. [Read more…]

SPY Failed Breakout, Bulls Hold the Edge

S&P 500 SPDRs (SPY) closed the week slightly down after a failed breakout to new highs. SPY stair-stepped down with two white candles Tuesday and Wednesday before the bulls finally relented Thursday allowing SPY to test the daily 20. However, bulls stepped in late in the day and continued Friday to push SPY back to near price resistance int he low $211’s. [Read more…]

PowerShares Trust (QQQ) Holds Critical Support Levels

PowerShares QQQ Trust (QQQ) held up rather well this past week despite a failed breakout. The main support levels to watch are left in tact though QQQ is getting squeezed between these and a strong move should be expected at some point within the next few weeks. The recent failed breakout makes it more probably that eventual direction will lead to a decent pullback.  [Read more…]

Small Caps Break Six Month Uptrend

IWM failed on a performance breakout last week and that in itself was a sign something was wrong. The small caps ETF failed to make new highs as SPY and QQQ did. This lower high was confirmed with significant follow through this past Thursday and IWM has now broken a six-month uptrend.  [Read more…]

The Short Term Case Against Biotechs

Biotechs may have put in a possible top and, for the time being, have lost major support levels. I’m looking at the recent failures to make new highs in addition to coming close to making new lows. I’m also watching options activity on the two top ETFs and several stocks, all of which suggest more downside is coming. [Read more…]

Twitter (TWTR) – Risking $295 to Profit +130% with a Bull Call Spread Ratio

Twitter (TWTR) reports earnings after hours today. The ITM straddles currently suggest a 10.5% move up or down. By comparison, Apple’s (AAPL) expected move yesterday was around 5%.  I’m taking a look at past performance to see if we can find an edge and, if so, what is it?

TWTR - 1D CDL SMA - 2015-04-27

TWTR – 1D CDL SMA – 2015-04-27

TWTR has been on a moderate uptrend since an early February gap-up and seems to want to keep trying. Unfortunately, it’s been tough to trade longer than overnight as any breakouts quickly fade. This leads me to believe we have an enormous level of supply between the current levels in the low $50’s and October, 2013 high in the mid $55’s.

MACD, RSI and OBV are in bullish territory and showing positive divergences. In addition, while TWTR has been tough to trade I haven’t changed my overall bullishness for it. There is a short float of 5.2% so don’t expect any big short squeeze.

One of the things we look at as earnings approach is what type of move the market is pricing in. We do this by looking at in-the-money straddles. TWTR is current trading in the low $51’s. Straddles at the $51 and $51.50 strike are trading between $5.30 and $5.45. This suggests to us the market is not expecting a move over 10.5%.

But how has TWTR handled this in the past? I went back and pulled up the five previous earnings releases to gauge performance versus expectations. I found no edge in the results.

ATM Straddle Bid ATM Straddle Ask Close Expected Move Within Expected Move?
5-Feb-2014  $                       9.20  $                        9.70  $  65.97 15.158% N
29-Apr-2014  $                       5.45  $                        6.00  $  42.62 14.078% Y
29-Jul-2014  $                       4.45  $                        4.63  $  38.59 12.957% N
27-Oct-2014  $                       6.60  $                        6.85  $  48.56 14.415% Y
5-Feb-2015  $                       4.82  $                        5.05  $  41.26 12.118% N

I was reluctant to include the first earnings report but I left it in anyway. Regardless, the results aren’t inspring.

I wanted to see what the actual results were one, three and five days out. For this I did not include the February 5, 2014 report.

Max Move Up Max Move Down
1D Return 4.29% 10.92% -16.65%
3D Return 3.68% 15.40% -14.61%
5D Return 4.98% 17.10% -13.14%

 

While the averages seem impressive, you can see there are some significant price swings in there. The lowest returns were during the April 29, 2014 report which generated +9.37%, +9.03% and +9.99% in one, three and five days, respectively.

What I want to do is take on a bullish position but take volatility out of the equation. Obviously we want to minimize our risk giving us the maximum potential profit possible. Selling a straddle is way too risky. A call ratio spread would help but it doesn’t take away volatility.

A bull ratio spread would, however. A call ratio spread just neutralizes the delta. We want to neutralize the volatility while giving ourselves a bullish edge. This will not give us an unlimited profit, but it does give us a good range on the upside.

I’m looking for a big move, at least the 10% that is expected by the market. With bull ratio spreads though, we have to be careful. Though we’re leaning bullish, if TWTR blows up too much in our favor, it can actually hurt our position by turning the spread delta-negative – this makes it a bearish position and we lose money. In fact, TWTR could run so much so fast that I actually have more downside on the long end than on the front end.

Why is this? To open a bull ratio spread I am doing a 3:2 position or buying 2 May 1 $51 calls while selling 3 May 1 $56 calls. This helps neutralize volatility while giving me a bullish edge in the trade. The May 1 $51 calls are trading with a delta around +0.52 while the May 1 $56 calls are trading with a delta around +0.25 (0.25 * 2 = 0.50). The extra +0.25 sold makes the overall delta +0.27 which makes the overall position bullish.

Breakeven points are > $52.40 and < $63.20. Anything between these two points is profit with max profit coming at $56 on Friday close.  My risk on the downside is limited to a debit of $2.80 so should TWTR actually move against me after earnings I am only out the full costs of the trade ($2.80 + commission). However, I do have significant risk on the upside should TWTR make a run past the $63 breakeven point. That would be a +24% move from a $51 close. Only twice has TWTR moved over 20%; both of those instances were gap downs in early February. Not to say nothing is impossible, but it’s rare.

That being said, we don’t live to fight another day by making stupid unprotected positions. If TWTR runs past $63 and never looks back, I’m screwed. Forget that. So we buy the cheap $63 calls at $14 each making our max debit $2.94. This gives us a chance to profit up to +130%. Not ideal, but not bad.

TWTR - 2015-04-28 Bull Ratio Spread Parity Graph

TWTR – 2015-04-28 Bull Ratio Spread Parity Graph

PowerShares QQQ Trust Regains Strength vs SPY; Potential Change of Character

PowerShares QQQ Trust (QQQ) may have taken back it’s leader-status in strength over the S&P 500 Index ETF (SPY). The Russell 2000 Small Caps ETF (IWM) had attempted a breakout of strength but this breakout seems to have failed. Meanwhile, QQQ closed yesterday pushing against resistance. It now sits just $0.52 or 0.47% from a new 15-year high. The all-time high sits at $111.07. Despite this, there is still work to be done. For now, though we have some reason for optimism. [Read more…]

Trading the Double Bottom in Activision Blizzard (ATVI) for Possible Double Digit Gains

Activision Blizzard, Inc (ATVI) popped up in one of my lists and I couldn’t help but notice a massive double-bottom that had formed from late last year through early this year. That double bottom was confirmed with a breakout on massive volume in February. ATVI ran a bit more before getting into a nearly two-month-long consolidation zone. This consolidation zone itself may be a smaller double bottom. ATVI is trading near all-time highs with earnings being reported May 6 after the market. This is my trade plan for a very confident breakout to all-time highs.  [Read more…]