The US stock markets got a significant boost when non-farm payroll (NFP) data came out way better than expected. By the close, the S&P500 index was up 4.91% for the week and 47% above the March lows, while the Nasdaq closed (+2.81%) for the week marking fresh all-time highs. Despite the market rally over the last few weeks, some members, investors and traders didn’t see the same performance in their portfolios. With this in mind, we hope to address some of the concerns voiced by our members, while also covering many of the questions fielded over the past few months in this post.
Summary
We will begin by framing this article around questions from one member, who had numerous queries regarding relative performance.
Should We Day or Swing Trade?
We’ve been answering the same questions these past few weeks, so a video seemed the logical approach. Member questions were the main reason for creating the Daily Workflow Video.
From the video, all new positions start as a day trade and only develop into a swing when
- 1) the stock closes in the upper half of the daily range or
- 2) the stock closes at the high of the day.
With this in mind, we recommend listening to the LIVE broadcast during market hours, where we talk through our thought processes, while sharing our charts, visually laying out plans during the trading day, while also focusing on stocks we’d like to day trade or swing trade from the watchlist.
Traders and members who cannot listen or watch the daily LIVE broadcast due to time constraints, a day job, or financial responsibilities, is the reason a weekly watchlist is created for their use. Entry stops and commentary is pretty straight forward and covered in the workflow video.
Example: The Top 5, ranked by performance from last week’s watchlist.
The daily blog addresses changes to market conditions that deserve attention, like gamma shift, as we address below. We frequently present new trades or candidates we’d like to review in our blog format. We also update watchlist positions as warranted.
Recently, we added a #gamma channel in the traders chatroom for gauging when to be aggressive and when to be defensive.
Finally, we create a weekend video to summarize all of the factors we see developing for the week ahead.
Now, let’s discuss some additional questions.
“What was my initial intention with this stock?”
“Was it a daytrade or a swing trade?
“For example, now I am thinking, the market is so high, its not possible that this kind of bullish momentum will last, so I have to be careful and not change my approach. Or, am I making it all too difficult and just need to focus on the market? Should I use an entry point and a target, based on a day or swing trade mindset?”
From your questions, it appears you do not have a reference point. Each day you wake up ready to trade. That’s fine, but you must be able to answer these questions, “what are institutions doing?” And, “how can I confirm?”
This is where the weekend video comes in;
- We tell you exactly what we see institutions doing.
- Where is money flowing?
- Are they buying or selling?
- What are they buying or selling?
- Are they positioned for safety or
- Are they taking an aggressive posture?
Gamma is the Key
Without venturing into the weeds, gamma looks at large changes and levels of open interest. This approach delineates their institutional footprints.
Typically, we look at the S&P500 and SPY options. This tells us where support and resistance will likely be encountered. It also answers the question, “should we be aggressive or should we be taking a defensive posture at this time?”
Prior to February, “gamma” was positive. Institutions were obliged to support the equity markets “buying the dips” while taking the opposite side of the trade. Institutions, dealers, and market makers always provide liquidity, so we constantly monitor what they are doing.
Ignoring institutions, is like flying at night without instruments. You’re trading and investing without a reference point.
Everybody was happy to be bullish or long at the highs. Yet, we got news of the corona-virus in January. It wasn’t until shutdowns and political shenanigans hit the airwaves that institutions changed their footing.
Very few traders know when or why the market mechanics began to shift. All they saw was a change in character.
When the markets gapped down February 24, gamma flipped to negative. These institutions switched to selling futures, offsetting their over-leveraged positioning prior to the drop. This change in character exacerbated the waterfall move lower. In other words, when gamma flipped, you as a trader or investor either went to cash or you went short the market.
What were the institutions doing?
This is where we told you, in the late February weekend video, wake up, the market has changed.
When gamma went negative, the markets literally changed overnight. We flipped to a safety mindset by hedging and taking profits off the table. We could no longer swing trade into a very powerful gale-force wind.
When the markets are gamma negative, you have an edge as a bear.
Over the past three months, those same dealers and market makers gradually dug themselves out of a hole, by selling hefty premiums (SPY/SPX puts) while VIX traded above 70 ~ 80. They made massive profits , while rolling or closing those puts as VIX dropped as each monthly OPEX confirmed. Institutions, leaders and market makers did this to avoid profit losses as premium leaked out of those puts.
March, April, and May OPEX came and went. Options expired. Open interest levels shifted higher.
As a result, markets moved from negative gamma, through neutral gamma, and over the past few weeks back to positive gamma. This literally means they will buy the dip and sell into the highs of each new wave up. They are supporting the markets by providing liquidity.
When the markets are gamma positive, you have an edge as a bull.
Granted, we are due for consolidation of the more than 47% gains from the March lows. Some expect 7-10%, while others forecast a time-based consolidation (moving sideways instead of lower).
Here are some additional items to consider going into next week.
For the past three weeks, we’ve seen TICK cumulative green and rising. It turned green on Friday again, after a brief dip into the red. The trend in this indicator is bullish and intact. This tells you in real-time what institutions are doing. If TICK is green and rising, they are buying more on the uptick than they are selling on the downtick. That’s bullish for the trend.
In addition, we saw the bond stock ratio dropping since late March. We told you this gave us reason to favor equities over bonds as the ratio heads lower. We also noted junk bonds and high yield corporate debt were rallying. This said investors and institutions were bullish as these two rose.
SPY Weekly – Support
The weekly SPY chart shows support at the 310 level, which aligns with S&P500 3100 open interest. Volume by Price (VBP) is major support below this level, as you can see at the left side. RSI suggests more upside is possible. MACD shows bulls are in control of the momentum pendulum.
The SPY daily chart at the top of the page echos this VBP support zone.
Into June, “with a break in the bullish trend and higher volatility not anticipated unless we see a break 3050. 3150 is current resistance. Higher gamma levels suggest the market is fairly well supported.” In addition, “we saw very large speculative volume in Fridays expiration, but given that large of volume it appears that more gamma was heaped on today. That supports the notion that this was not yet the blowoff top. A quick scan of both SPX and equities show most options reside still in 6/19 expiration and I look to that week as a turn. – spotgamma
The 10-year yield turned up this week, so we’ll cover this bullish market development in this week’s video due out on Sunday (2:30 PM +/-).
Hopefully, we answered most of your questions. The workflow and weekend video(s) address the remaining questions.
Join us in the trading room for our LIVESTREAM broadcastduring market hours, as we navigate the current environment. Watch, listen and trade from 9:20 AM to 4:15 PM Monday through Friday.
Happy Trading,
Vinny
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Disclaimer: Do your Own Research
Our content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances. You should take independent financial advice from a professional investment advisor in connection with, or independently research and verify, any information that you find on our Website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. Trades and or positions listed and taken from the watchlist are my own and should not be considered “advice” to enter any particular position or asset.
Investment Warnings
We would like to draw your attention to the following important investment warnings. The value of shares and investments and the income derived from them can go down as well as up; Investors may not get back the amount they invested – losing one’s shirt is a real risk; past performance is not a guide to future performance.
Live Sessions
Live broadcasts are educational in their content. Proper risk management is considered on every trade or asset mentioned.
*** Stocks highlighted are for information purposes only and should not be considered as advice to purchase or to sell mentioned securities.
As always, the use of technical and fundamental analysis is encouraged in order to fine-tune entry and exit points to average seasonal trends.
These mentions are stocks that we may or may not decide to trade as outlined in the watchlist. Always use a stop.
In addition to the workflow video, I wrote my first book to address similar questions regarding, day trades, swing traders, and position trades, the latter which have more to do with retirement portfolios and the long-term health of our family finances. Our children were my inspiration, so they have someone they can trust to teach them about wealth creation long after I’m dead and buried.