I tried to write this shortly after 2pm, but the play kept on running, and it turns out we had three nice runs. My previous thread turned into a live update for those playing along. You can view that thread here. The play we were trying to make was based on a post I wrote yesterday, here.
As a recap, we were trying to profit from a potential over reaction sell off leading into the FOMC meeting notes release at 2pm, followed by an expected over reaction run post 2pm after the notes were released. We were going to buy spy and qqq calls dated 3/19 for exactly $1 OTM the trading price at 1:59pm, and sell during the run up. While this is usually specific enough for most to follow, the run ended up following classic TA making for a fun and predictable pump that would have been easy to profit from. I realize that many don't know how to do this, and so the rest of this post is dedicated to teaching you how I made this play.
Lets start with the setup. I knew we needed an over reaction sell off leading into the 2pm hour. This tells me that traders are not thinking rationally, and they are likely acting with emotion and fear. This sets us up for a FOMO run post good news. We knew based on numerous reports that the Feds were going to continue to keep interest rates low while reiterating how well the economy is doing, and not touching inflation until we reached pre-covid bond yields. Any monkey with half a brain has the ability to look at the various manufacturing indexes going up or unemployment going down or wages going up and can see that we are doing really well. These same monkeys can also look at the fact that 2.7T of stimulus has been passed since December and know that even if a few rough quarters happen in the near term, there is so much support we will be fine. In other words, there is enough openly available data that anyone with the will to look to know exactly what the Fed will do and what is in store for the economy. This means any sudden sell off that doesn't have a concrete piece of data to justify it is likely irrational, like the sell off we saw on Tuesday and today, and thus will likely be followed by a nice reactionary FOMO pump after everyone realizes they made a mistake. If we didn't have this setup, we wouldn't be able to enter this play with any degree of confidence. Lucky for us, you can see in the charts below, we had such a sell off:
With this setup in place, we could be confident that given all the good economic news, and knowing the fed will continue to support the economy well into it's recovery, that this was going to rebound hard. If we needed more confidence, we could also look for reversal signs in the charts to indicate a bounce might be imminent. On the nasdaq you can a reverse head and shoulders and a double bottom form an hour before the meeting:
I didn't see as obvious of a chart pattern for the sp500, however the two indexes did very closely track each other throughout the day. Aside from this one discrepancy they were almost identical, and I'm going to finish the rest pf this post with the nasdaq instead of showing both the sp500 and the nasdaq as they are almost the exact same.
As of 1:59pm, the QQQ was trading for $316.81, we bought $1OTM calls expiring on 3/19. The reason we want to buy calls and not stock is calls will multiple on a sudden 1-2% gain where as stock will just go up 1-2%. Short dated calls that are OTM will cost almost nothing, and thus if you are sure you can get a couple percent out of them within the day, you can 2-5x your money in an hour. Every dollar these are in the money they go up in value by $100, so even a $3 move in qqq would add close to $300 of value per contract. Considering these contracts cost about $300 a piece at 1:59pm, you could double your money almost instantly.
The risk is an unexpected Fed policy change or interpretation of the economy. If we dropped at all at 2pm, I would have sold immediately and probably taken a 10% loss in the process. You will loose money as fast you make it trading like this, so you need to cut your losers immediately, this is not like holding stock where you can just ignore your account for a year or two until it's all better.
Anyway, 2pm rolls around and as expect the price pops big time. Remember, there is no logic to this play or price target, or anything based on evidence or facts - this is all an emotional reaction to a previous emotional reaction, meaning we are going to play this based on TA alone, we only need the catalyst to get the run moving. This is a short term play too, so I'm watching the minute candles, not the 5min, or 15min, or anything else, just the 1min candles. I have nothing on my screen other than SMA lines, the 10sma, 20sma, 50sma, 100sma, and 200sma... though I often forget my 100sma. My charts look like this after the 1st 3min:
I usually dont color code my SMA lines this deliberately, but I did for this example to make it easier for you to see. The 10sma is in green, the 20 in orange, the 50 in red, the 100 in purple, and the 200 in black. Green is go, red is stop, by the time to get to the cold purple 100sma you are hurting bad and if you hit the 200 the blackness represents the emptiness of your account. Quite the visual. Not every stock or index trades like this, some follow the 20sma, some the 50sma, it all depends on the breakout. The first few minutes of a breakout tell you which lines to watch. You can see we broke well above the 10sma, so for now we will watch this line, and as long as we are above it, we will stay in the position, and as soon as we cross below it, we will exit - it is that simple when you have a catalyst like the FOMC paired with a perfect over reaction selloff. If you just tried to buy in every time you broke above an sma line without a catalyst you would likely loose money, and it is the combination of the setup and catalyst that makes this profitable.
Based on this strategy, that means we buy in at the green arrow and sell at the red arrow:
Imagine if the candles were following the 20sma or the 50sma instead - same deal, just buy when it crosses above and sell when we cross below. At this point QQQ has ran from 316.81 to just shy 321, and based on our entry and exit, we bought in at $316.81, and we crossed below at 320.27, meaning our $300 contract is now worth about $200 more dollars - or $500, $2 ITM=$200. Not bad for 20min of work. However, these runs often occur in multiple stages, so we keep watching. After consolidating for a few minutes, we see the candles break above the 10sma and the 20sma, indicating another breakout, so we buy in again - same contract, currently worth a little less than we sold it for. And again, we ride this until the price crosses below the 10sma at the red arrow below:
On this second run, we were able to buy the same contract back for around $450 when qqq was around $319 due to IV crushing fast, and we rode it until qqq hit 322, thus gaining another $3 per share, or $300 per contract. Unfortunately, the bid ask spreads didn't comply with this valuation and the contract only sold for +150, but still, a nice profit regardless. However 3min after this second run completes, we got a third run:
This one was quit a bit slower, and unlike the previous two, it was interspersed with a few red candles indicating momentum was dropping and this was likely the last run for the day. We ran this from 322.48 to 323.40, selling for another $50 a contract just shy of $700. All in all, our original contract we bought for right around $300 topped out at close to $700. If you look at the EOD data from TD you can see the low for the day was $2.63, and the highest that contract sold for was $700. Using our strategy, we caught most of that move.
Just as we were watching for signs of reversal leading into the 2pm hour, we have been watching for signs of reversal that this run is over. I pointed out in the post I was updating as these events were happening that I was starting to see a head and shoulder's pattern form and was concerned about the additional red candles. This is based on experience only. Truth be told, most of the time I exit here no matter what and the stock keeps running. The few times it doesn't, and I suddenly loose 30% of my profits sucks bad enough that I always walk away when momentum starts to dry up.
Today's run was super clean, and it was because of the setup and catalyst. It turns out I was right and called the top exactly (I rarely do this so accurately, I'm almost always a little early). It did form a head and shoulders and then deteriorated the rest of the day, though I did prematurely call the right shoulder in the moment and ended up calling the actual right shoulder so obviously seen below a bull trap. It is much easier in hindsight than in practice, but do go through the live updated post to see this in action, here.
Often times there are other more cryptic signs and runs aren't this clean. If you look at the nasdaq from last Friday to this Monday you can probably pick out some small runs here and there, but you aren't going to capture the whole move, and you aren't going to make much money on options as the options pricing probably wont swing much during the moves you can see.
However, if you look at the exact some two day period on the 30min candles, a cleaner run becomes more obvious, and you likely would have held into Tuesday at noon when we finally broke below the 10sma:
This is why the period you choose is so dang important when using TA, and you need to be willing to make changes. Of course if you want to swing something over multiple days, you want to buy something with enough time on your side that theta decay doesn't hurt you, so 4/16 monthly qqq calls would have been great here. As I alluded to before, without a proper catalyst, TA alone is not going to help you much, and you will in fact loose money by buying every false breakout you see. This is why we always discuss catalysts and fundamentals too.
For the sake of completeness, let me show you some additional tricks I use to call peaks during FOMO/emotionally-driven pumps like this. Lets take a look SPCE's most recent run:
We knew in late December that SPCE would try to fly again, and would announce this in the coming month, so we had an imminent catalyst. Early members of RiskIt know how much I posted about this. Knowing this is why I started accumulating 50c leaps and 40c April 16 calls in late December. Sure enough, the announcement was made and we started running hard again. If you look at the black arrows, notice the formation of the really long tails on the candles as the pump continues to steepen. From my years of algo trading bitcoin, I know these to be signs of a peak forming. And if you look at the second black arrow you can see the huge tail at the top of what appears to be a parabolic run in the stock. I sold all of my calls and shares at $53 as this tail formed. I made over 400% on my 50c leaps alone. What often happens in these scenarios is the price comes down as fast as it rises, crushing IV, leaving you exiting your position, as the price slams below the 10sma, with little to nothing and too stressed to think it was worth it. I have learned to always exit as soon as something starts to form long tails and goes parabolic. That said, the reason I like this example is because in this case I left money on the table. I continued to watch the position and I could have made 550% on those same leaps if I waited until we actually crossed below the 10sma.
Here is an example of why I always exit when we go parabolic. Take a look at bitcoin during the 2017 run. Yahoo finance sucks and isn't showing the exact peak on the 1 day candles, but the tippy-top of bitcoin was about $19.5k, and I sold my last bitcoin at about $18.2k 30min later. Had I not sold this and I waited to exit once we crossed below the 10sma in green, I would have sold the following day for $10.6k. When the market is definitively irrational, never feel bad about taking profits.
You can find tons of these examples in the stock market too. Many of you know me from my original post under this account for calling ABML back in May, when it was 5 cents. Welp, I have been trading ABML using similar strategies, and check out this monster run it had in January:
I thought the green candle prior to the one at the peak with the huge tail was going to be the peak and I sold just shy of $3.50 instead of for $4.50. Yes, I left money on the table selling a bit early, but lets be honest here, seeing a parabolic move with that monster of a candle, no one could know that wasn't the peak. There were catalysts to play too, AMBL is in the process of building a lithium and battery metal recycling plant and they also own lithium brine claims capable of producing over 200M of lithium annually. Twitter finally figured this out, and December was a fun month giving way to complete irrational emotion that caused the run you see above.
All of my mistakes made with this strategy are buying into false breakouts. Either trying to buy when there isn't a catalyst to drive a move, or not understanding a catalyst and playing it incorrectly. And false breakouts happen far more often than real ones, which is why you need to be very particular about the setup and catalyst. For example you need to understand the economy to know what a good catalyst is when trying to play the FOMC meetings or similar catalysts.
The lessons for playing breakouts are to 1) be flexible with the periods and choosing the support line - the 10/20/or 50 sma, and to 2) be conscious of parabolic moves and long tails forming. As long as you have a strong catalyst, you can make money playing the subsequent run, and if you are diligent with profit taking, you can call tops pretty accurately as long as you error on the side of caution. The reason I called the top on QQQ and SPY today was because I was cautious and I saw the run slowing, ie the red candles, and got out, but I often exit too early as I just showed you with SPCE and ABML. Nothing wrong with that though because you still make money.
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