Today we timed a perfect bullish entry on the Russell using an IWM bull put spread betting that the IWM will stay above 133.5.
The max profit for this trade is around $1,200 – which we will receive as long as we stay above 133.5 at Feb 03 expiration.
We could have gotten a bigger gain if we used a long call strategy – which is what we tried last week – but it’s riskier. Last week it didn’t work out as the rally we were expecting to happen last week didn’t happen til today.
Still, the profit potential is defined at $1,200 – and we don’t have to worry too much about exiting too at the right time. Don’t care too much about any short term pops and drops – as long as we stay above 133.5, we will collect the max profit
The downside is we don’t get the upside if there’s a big upside move – but that’s OK, because we also have the TNA (3x Russell) ETF – in case there’s a bigger rally. But whether there’s a bigger rally or not, all we care about is that the Russell at least roughly floats around where it is now.
For reference purposes, when we say we are betting that IWM stays above 133.5 – in terms of the corresponding futures chart (symbol: TF) for Russell 2000 – that usually corresponds to around the 1343 region.
So on the chart below, as long as we stay above 1343 – then we collec
Meanwhile, the pattern in the S&P is highly confusing.
I do not know why the rally happened today instead of last week – and the pattern is not clear at all. But here we are at new highs in the upper 2270s.
This diagram is a bit more steep than the Russell chart – but you can see the 1, 2, 3, 4, and 5 numbers corresponding to the Russell chart above.
This might be the same pattern that appeared in the Nasdaq in early May 2016: That was an Ending Diagonal:
We touched 2280 – but closed around 2275.
The prior high spikes in the 2272 region from the trump inauguration and before should serve as support at this time for the 4th wave down.
Holding around 2260 overnight was critical to maintaining a bullish stance – anything short of that would have resulted in further whipsaw.
At this point, the lower 2270s must hold in order for the rally to continue.
While the S&P chart is confusing – there are some clues that we could gather from the Dow chart – which is a descending trend line that broke into the inauguration – but pulled back.
On Monday Jan 23, there was a fakeout attempt rally that tested the lows – once again and formed the right shoulder of an inverse head and shoulders pattern.
The overnight consolidation is the big clue that we would rally today. Holding overnight without much of a dip was critical to sustain this pattern setup.
And it seems once we broke out in Dow – we also broke out in all the other indices.
Last time’s S&P chart suggested higher highs and higher lows – but this invalidated – as over the weekend we dropped and just broke the prior lows around 2252/2253 – before bottoming and reversing to make new highs.
Usully when there’s a failed rally – as there was going into the inauguration – that would be the b-wave top – and in order to reattempt that b-wave top – we would need to break the prior lows of 2253 or 2260. That’s exactly what the market did – run everyone’s stops and fuel a potential short squeeze back above.
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