Bearish Wedge Practice Trades | John McNichol | 2-24-20|Technical Speaking: Breakouts & Reversals


hey thanks for the heads up there mr. Boston so John McNichol and welcome to technically speaking breakout and reversal patterns as was mentioned we can see that de we can see that the market is down on the day what we’re gonna do is we’re gonna take a look at the market see if there’s any bounce that’s occurring we’ll also go ahead and take a look at some bearish breakouts utilizing vertical spreads so hopefully stick around and will be with us or maybe a little bit of a sound delay so everyone should be picking me up now so it’s going to take care of disclosures and we’ll get right into it options are not suitable for all investors as a special risks inherent options trading may expose investors potential and substantial losses carefully read the previously provided copy of characteristics and risks of standardized options now in order to demonstrate the functionality of the platform we will be used in actual symbols keeping in mind TD Ameritrade does not make recommendations or determine suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility now we have a demo account for our practice trades looks like a real account but it is not you have the ability to practice what you learn today with paper money that software is also for educational purposes and successful virtual investing during of actual funds during a later time period as does not guarantee successful success of actual funds during a later time period as market conditions change continuously as always past performance of any security or strategy does not guarantee future results or success and keep in mind as far as with the transaction fees at zero Commission applies to u.s. exchange listed stocks ETFs and options trades there is a $0.65 per options contract fee that applies those option trades and there’s our Greeks and here’s our agenda we’ll do a little market and sector check talk a little bit about some bearish breakouts and we’ll practice placing bearish vertical trades so let’s go ahead and share the desktop see where we’re at once again thanks for being with us Gary Boston Nathan everyone else that’s coming online right now and let’s go ahead and bring up bring up the S&P 500 now those you may have joined me earlier today we did a future session at the market open talked about some tools such as Fibonacci which may act as areas of support and resistance when we see prices break down you know looking where some of those potential support areas are and when we hit the lows for the day some inflection points if we actually take a look back on some of the circumstances over the last month or so at least going back to the beginning of the year so starting off with that we have the S & P futures right now off of the lows as we go ahead and get our drawing tools together here let me go ahead and slide this over here we hit a low add around I believe it’s around 3213 and change and kind of give a bit of a reference point where the low of the day is essentially came down and I think went only about a quarter of a point or so lower than the low from January and as we go into the afternoon coming off of those lows now another inflection point if we look at some of some of the events back in here was going into the beginning of the new year where we had the attack the Iranian attack in Iraq and then over this period the initial reaction with the coronavirus and we can see much more dramatic reaction based off of more current events and seeing how the remark market may have reacted after some of those events for instance probably a word that’s common today is panic but panic can go both ways some trader has made the argument that we’ve seen panic Buying as well particularly prior to the event over the last couple of sessions and we’re gonna see on how this plays out here but certainly a bit more of a dramatic reaction to what we’ve seen to date and those reactions have become much more volatile looking at some of the various price levels utilizing tool called Fibonacci retracements what I did was I went back and identified the low back in January or correction back at the beginning of December which is kind of the prevalent trend to date going up to the high today’s price action essentially has retraced about 50% of that move from the lows in December and some traders may look for that as a possibly a little sign of a relief after such a strong movement and it’s not uncommon to see these types of retracements albeit for it occur relatively quickly in this case only about three or four sessions we’ve seen basically three the red color here just over the course about three or four sessions taken away whatever gains that we’ve seen over the last going into the beginning of the year and about half of the gains from December’s rally going well into February so that’s what we’re seeing again coming off the lows but even as I speak kind of fading back below that 50% retracement which is showing at around that thirty to thirty level so bulls are certainly a not in command as of yet as we go into the end of the day if you look at some other indices bring up the Russell and those of you that have been following this class we’ve been discussing some of these common reversal patterns and we had pointed out about the Russell to being relatively weaker compared to some of the other indices whereas the larger caps have made higher highs the small caps actually made lower highs and we actually did attempt to take advantage of that with our futures class on high light in that resistance at around 1700 looking to see that if we would at least hold not necessarily predicting as technicians you know we’re not predicting that Oh markets gonna move that quickly that fast but looking at different levels of support and resistance and seeing if they would hold or not and so far we’ve had that 1700 level hold and we’ve seen a pullback in that price now does that change the trend going ahead and looking at the lows and same thing with the Russell kind of around that 1600 area a bit of a psychological area considering that kind of more of our neckline for this overall pattern to see where we go now the Russell actually did not test the lows from earlier in the month there so still slightly a bit of a higher low but we’ve seen a lot of the major averages break down below some of those intermediate averages or the trend so we’ve seen up trends being broken now it’s a matter see if that will continue to capitalize on the downside or not and then we could probably see the same thing as we look at some of the other indices like the Dow and the Nasdaq let’s bring up the Nasdaq real quick notes to say as we look at the Nasdaq Nasdaq has traded down in my example of 55 period moving average some traders may refer to that as a inverted hammer and so this is going to be the argument is the dip to be bought once again common saying as far as the traders that after every sell-off trade buyers seem to step in and try to take the markets higher and that certainly may continue in a bullish trend but at some point we may see or start to see some failures like we did in the small caps already now with this being just holding barely holding that fifty five period moving average even with that Nasdaq still is given back all the gains for February and pretty much coming back into around middle of January again kind of like a lot of similar reflection points although if we go back to compare to let’s see going into the beginning of the year this is around the Iranian attack here’s the initial reaction to coronavirus and here’s the additional so Nasdaq not beaten down as much as some of the other indices like the S&P and the and the Russell but nevertheless still given back a lot of those gains and a for that that’s based off of a lot of the strength in the technology sector as we leave in the technology sector even here kind of coming back to the initial coronavirus being priced in yet still being a little positive on the year think intraday we may have tested some of those gains on the year but technology still kind of holding out there and if go ahead and take a quick glance at some of the some of the sectors let me bring that up on a public list and we’ll bring up just had it up there a moment ago there’s our sector indices and looks like I’ve sorted from the worst on down as far as with the leaders on the downside very much looks like commodity based and production based Energy Materials industrials all being down with energies being down four point seven percent materials being down three industrials being down three consumer staples let’s bring that over a little bit Make sure I’m getting the right description here both the discretionary and and a little trouble adjusting that yeah discretionary stocks being down followed by staples health care everything across the board all looks like all sectors being negative let’s go and sort that one more time there because it doesn’t look like it’s doing as I expected there we go actually it’s information our energy followed by information tech being some of the biggest losers there consumer discretionary financials and health care the sectors that are still relatively hanging in there and is it try and get my tools up here utilities real estate and consumer staples being down but not down as much everything else so our defensive areas of the market not taking as much of a hit so you may hear the term which is referred to as risk off market firmly and a lot of this started last week as we started seeing a pullback from Thursday going into Friday and certainly accelerating starting with the futures last night and continuing on to into today as you’ve made those lows and again as we speak there’s a little bit of a push higher before I came into the class but looks like we’re still kind of fade in a little bit back below that fifty percent retracement so we’ll see who wins out on the day so far the Bears are more in control so with that in mind let’s talk a little bit about bearish breakout setups now there’s a few other sessions that I teach swing trading which will be tomorrow at the market open that’s where we may look for some bounces in the trend whether bullish bounces or bearish bounces now since we’ve seen a break down a lot of stocks as well as sectors have broken down below support and some of these are some of the very same patterns we’ve been reviewing in previous weeks one of those patterns is what’s referred to as a A rising wedge we were looking at some stocks that were pulling back over all over the last month or two and then they kind of rallied up as with the rest of the market but actually making some lower highs think along the example of the Russell that we were talking about kind of that failed rally we’re looking for examples of stocks that may have been doing some similar after falling down coming up making more of a swing failure and breaking down and let’s bring up a couple examples and we’ll go ahead and do some more comments from Chuck talking about you know the effect of China virus it may get worse so it’s kind of an important point here you know when we look at the markets look at trends look how price has been reacting many investors and traders may have certain opinions on you know what is impacting the markets some pundits a prior to the events over the last couple of days may have made arguments that one was over emphasizing the coronavirus and its impact and you know the market seemed to kind of take things a bit higher now other pundits may be thinking that well the market may be overreacting to what’s going on the thing is from a technical standpoint and from psycho psychology is sometimes it doesn’t matter what the event is some investors or it’s institutions you know anything could be a driver as far as that selling pressure whether it’s extremely important news or not so important there are different catalysts that may you know drive that buying and selling and as I highlighted on the chart already we can see what some of those reactions were to some major events over the last it’s will go in year-to-date and with that in mind we can see that you know reactions have been much more volatile whether to the upside as well as to the downside and so you know with those emotions on end we can possibly continue to see some erratic movements into markets and we can look to hopefully in some cases possibly to try and benefit from some of those we teach various strategies that deal with volatility and you’re welcome to go ahead and join us on those classes just by looking at the schedule so with that I’m gonna go ahead and bring up a couple of stocks from the long vertical class this is something I teach on Thursday at 3 p.m. Eastern Time three stocks we were looking at which was a 3m Pfizer and Valero so let’s go ahead and bring those up we’re gonna go and go to the charts I can’t gonna remove that tool and I’m gonna go ahead and plug a few of these in I’m gonna go to the big screen here so looking at our example on this is 3m now prior to the current events 3m already a bit weaker as we see more of that downward swing prices breaking a previous trend try and do a little contrast here as far as with some of our colors here breaking down below a previous trend have a 55-day moving average as a reference point broke in that trend now more down so traders may look for more of a bearish type trade we had a what we call a rising wedge price kind of rising over the shorter term a counter move and we were looking for a break down of that pattern which we had done I believe this is about a week and a half two weeks ago prices went ahead and broke down and as far as measuring traders will potentially go ahead and take a look at the distance between the support and resistance or at least looking at the previous move and attempt to project that same move down so in this case with 3m we had from a range from around 177 down to about 150 looks like about 156 there so that was about a $20 move and then going from around 165 that would potentially target closer around 145 now currently we’re at about 152 another example we’ll go ahead and take a look at Pfizer this is kind of a a similar formation where again we see a sharp move down in price so I’m going to move this over a little bit here for me sharp move down in price and we see kind of that retracement we call more of a rising wedge now some traders and if it’s on a smaller period may see it called what we call it a bear flag and basically measuring the same distance from the resistance to support this was approximately about a $4 move so from around 38 $4 move would be around 34 so this one again has kind of hit its target their last one Valero vlo same principle we see a sharp move down in price trying to get another color here sharp move down in price kind of the bit of a rise again forming that wedge and when that price breaks down looking for a similar move so this was from around 89 let’s see down around 81 so from that apex here around 86 that should be which at least a $9 move so we kind of reach that target as well now when we did these examples we were looking for price to move down based off the previous trend however did not necessarily expect it to move as quickly in fact this set ups we were looking at we actually really didn’t expect it to move down sharply we were just looking for it to move down a little bit and stay below that level over the course of several weeks now with these positions the examples of vertical spreads we have about ten or eleven days before expiration a lot of these are profitable at this point since they’ve made those moves much more quickly than anticipated now what we’ll do is we’re going to take that same principle and we’re going to apply it to a few other stocks but let me go ahead and show you these other examples and we’ll manage the profits on that one and if you want to learn more about these strategies on the education tab when you go to your webcasts every Thursday we have long verticals and diagonals and yours truly will be teaching that at 3:00 p.m. Eastern Time another strategy short verticals is taught by Mike Fairborn on the previous day on Wednesday so I’m going to go ahead and go back up to the chart here I should go to my positions as soon as I get rid my drawing tools here we go and you can also take a look as I’m tracking the P & L percentage this is a column that you can actually add it’s called P&L percent this is one where one can track your target goals for some of the strategies in the long verticals we are typically targeting at least a 50% or more return on the risk that we were taken and as you can see here these are already well above there in some cases more and so I’m just going to go ahead and close out these examples by just right clicking closing out the order and you know one of the reasons is well John you know why close out or take the profits now you know if you have more room to make some gains there’s about 11 days left now if you’ll notice on this spread this is a two dollar and fifty cent wide it’s a 160 to one fifty seven and a half that’s basically two dollars and fifty cents that’s the most that could be made or lost on that spread whatever one is able to make on the spread whatever’s left is what you’re able to lose now basically the value is this spread right now is out at about a buck ninety so there’s only about 70 cents of value that’s left in that and some may consider hey if one realized well above your target how much of your gains are you willing to give back to try and squeeze out that extra gain and some traders may consider not to do that and with our example as I’m trying to and for some reason my screen does not want to reset that’s if I can go ahead and get out of here bear with me for a moment folks I’ve had a few gremlins with my drawing tools and hopefully that took care of it see that does it there we go so on on this one we had basically had sold or bought three dollars and 30 cents and sold 225 so this was basically a debit of about a dollar five if I am doing that correctly there yeah about a buck five and by closing out the position I’m picking up about close to 80% of that return on risk so I’m gonna go ahead and attempt to close this out and there’s a little bit of a spread here I’m gonna go ahead and as we close it up a little bit see if that gets filled and we got that taken care of and likewise these other two already well above some of those profit targets so we’ll go ahead and we’ll close that out notice on this one here this is only a dollar wide and it’s currently at 88 cents there’s only about an additional 12 cents per share that could be gained on that so after realizing you know well over 80 90 percent of that maximum gain we’re gonna head go ahead and close this practice trade out now notice you know there are transaction fees 65 cents per contract and with this being a 10 contract spread that’s about 20 contracts there so we’ll go ahead and take care of that and let’s go back got one last one here on Valero I can see the P&L on that and we’ll go ahead and close this one out and that way particularly if the market is bouncing which you know as we were looking at wasn’t but notice as we’re speaking on how quickly the market can move we can see that we are coming right above that 50 percent level again now we look at some of your questions real quick Romero’s commenting on some of the retracements a few other comments on there some of you are looking for you know more of a pull back in the market certainly opinions may vary there but this was an opportunity for us to take profit on those bearish trades now let’s talk some other examples and let’s see here I’m gonna bring up Starbucks SBUX and if one notices may see a similar pattern here as some of the ones that we’ve been talking about already let’s go into big screen on this one so looking at Starbucks with previously and an upward trend you previously see that upward trend price is kind of breaking down form in some lower highs another example of that rising wedge we receive a sharp move down usually potentially a break of that trend and prices rallying up kind of forming again that wedge all in do is connecting the highs and lows on that pattern now when one sees some of these wedges that occur near tops if you take a little bit further look back and you see the rising highs transitioning to lower highs there’s that head and shoulders pattern and depending on how one looks at it you know that neckline on Starbucks did potentially break down if one’s looking at some of these average prices at around that eighty-seven level now this was a gap and gaps are what some traders refer to or at least I’ve referred to as an over achieve and breakout it basically broke below there now one may look at this as glass half-empty or half-full yes much like the market you know we’re at a previous low some traders may be a little more optimistic and see that as being a inverted hammer and look for the price to bounce which it may do however what’s the expectation going forward how does one see this over the coming days two weeks let’s say as an example one may see that okay we saw a break below that head and shoulders and yes prices may retrace up a little bit well what if the expectation is that over time this price may drift down a little bit we can use a vertical spread to try and take advantage of that if the price moves down and it doesn’t necessarily have to move down as much to do that so let’s see if we can construct one and see how this stands up now keep in mind earnings certainly can be on the table there but with earnings on Starbucks being out there in April we’re going to look for an example of a trade for a spread that would expire sometime in in March okay so let’s see what we can put together and enjoying the comments on there even though I may not be able to comment on some of them so I’m gonna go ahead and go to the trade tab and we’re gonna look at an expiration going out close about 30 days we got about 25 days in March there and what I’m do is I’m going to look at the puts now if one wanted to and if they were bearish they can buy a put however in this case we’re gonna buy a put but we’re also going to sell one against it which is going to reduce the cost of the trade it’s also going to lower our break-even so the price doesn’t actually have to move as much for us to be profitable on this example so let’s go ahead and select a strike now on our example for this long vertical we’re gonna select the strike that’s close to being at the money in this case the stock is at 85 just shy about 85 84.97 to be exact so we’re gonna look at this 85 strike so I’m gonna go ahead and right-click on it and we were right-click I can actually go ahead and select buy vertical so I’m gonna select buy vertical and this is a 50 cent wide spread now looking at the short strike as I move the tools out of the way looking at this short strike that’s 84.50 one may select the short strike where they believe that the price will be at or below at expiration so if we go back and look at the chart you know currently at 84 if we look at previous moves to the downside just um go ahead and draw a line down for that swing I’m going to right click on that line duplicate it and I’m gonna go from that lower high and so that would be somewhere down at around eighty-one now one could go ahead and target that 81 they can also target potentially any level in between there so let’s say we look somewhere not necessarily strongly down but somewhere in that 83 82 level so I’m going to go ahead and change the strike let’s say well change it to an 83 so this is a $2 wide this would cost us 81 cents notice that’s less expensive than just the long option at around 2.35 if we hit the confirm and send we can learn a little more about the maximum gain as well as the maximum loss for this trade basically the maximum loss would be whatever we paid for that option which in this case is 81 dollars per contract plus Commission’s the maximum profit is going to be the spread which is $2 minus what we paid for it 119 so as you can see when you combined the maximum gain and the maximum loss on the spread it should equate out to the spread and if we’re risking 81 to make 119 that’s greater than a hundred percent return on risk a fairly common as far as on the at the money to out of the money strikes on looking for that type of reasonable return now the probabilities may not be as high we’re kind of more at the money but this is a directional trade we’re gonna try to trade a direction but the price doesn’t actually have to move as strong for us to be profitable that’s the breakeven that I referenced which is right here the break even on this is 84.19 the stock right now is at 84.96 the stock only needs to be about 80 cents less than that below where it is right now at expiration for this to be profitable minus any of the Commission’s so spreads can be a little more forgiving as far as direction if price doesn’t move as strongly down it doesn’t have to move strongly down just has to move a little bit down so let’s see if we can go ahead and put this one together and what we’ll do is we’ll position size to a maximum loss which is taken the cost of the trade which is 81 and determine how much we’re willing to lose into trade now I’m just going to go ahead and do ten contracts for our example hit confirm and said so the maximum loss is going to be eight hundred and ten dollars which is well under a half a percent of my practice account here and the maximum profit would be just shy of about twelve hundred dollars so I’m gonna go ahead and click send and we’ll go ahead and attempt to manage that now that did not get filled right away so I’ll take a closer look at that later see if we can get that filled sometimes you may have to go to the monitor tab go to the working orders we can go ahead and right-click on it and do a cancel and replace and notice the natural price is a little bit higher around 85 now the more we pay for it we’ll cut in our return I’ll just go ahead and come a little bit higher here let’s see if we’re able to get it around 83 and we got that all right now see we can do another one or two kind of show an example as far as not all doom and gloom but there are stocks that still may be positive I just want to kind of highlight this example of a bullish reversal we’ve been seeing examples of bearish reversals in the market is making tops this example is a VTR ventas which is a REIT they’re post earnings and apparently had a positive event as the price went strongly higher looking at the resistance and what we refer to as an example that inverse head and shoulders prices were previously making lower lows transitioning into those higher lows traders or investors measuring the distance between the support around 54 and change the resistance at around 59 so 54 to 59 that’s about a $5 move and so that projection based off the pattern maybe closer around that 65 mark now the price is already made about half of that move but what some traders or investors may look for is that if the price pulls back and looks for it to bounce then they may look for that other opportunity and this type of setup is what we talk about in our swing trading class at the market open tomorrow so we’ll see if there’s anything that may line up with that likewise you’d figure stocks like Clorox CLX you know with people probably want to be a little more cleaner actually did bounce today some traders may for the breakout perspective you know may look for if this continues go a little more sideways look to see a break higher and then one can trade that direction or possibly do an example of a bullish spread which we’ll review in some of those classes and see if we can go ahead and get one more in before we have to go ahead and wrap things up here is O’Reilly Auto Parts and again you know this is kind of another example just as a market’s kind of at an inflection point a lot of stocks may be at a bit of inflection point as we’re kind of at that support looking at previous lows we can see some previous sharp moves down on O’Reilly and these would be examples of what some traders may refer to as flags in this case bear flags are kind of like rising wedges but relatively smaller in nature only go up a couple of days and then followed by another sharp move now now as we’re looking at the current price action something similar sharp move down and we’ve seen this kind of just a slowly little drift up not much momentum and think about in the context of what the market was doing the previous week or two which was making new highs O’Reilly relatively weaker they did break down today now there is a green candle so semblance of you know potentially a bounce occurring but again I’ll use the example that we did with with Starbucks Made the assumption is as far as with the bounce that it’s not as strong or a little weak and potentially break down again we can look at a spread trade possibly a lower entry point as far as cost and that the price may not necessarily have to move down as much for it to be profitable it will have to move down and if the price does go higher then that will be a losing trade but we do and will in this example position size to the most that we’re willing to lose on the tray so I’m gonna go ahead and bring up a o’Riley here again and we got 25 days I’ll look at the same example now one consideration is look at the spreads a difference between the bid and the ask price as you get into more expensive options you can see those spreads possibly being a little bit larger there one guideline that we’ve been applying is making sure the spreads no more than 10% of the ask price so with an $11 option that should be no more than about a buck and change in this case it’s only it’s about 50 cents so let’s go ahead and see if we can fire this one off I’m going to right-click on that 50 Delta which is basically we’re looking for the strike that’s closest to the underlying stock this is another example of a long put spread and we’ll go ahead and buy a cheaper option against now these are $10 wides here well if I go ahead and right-click and we’ll do a buy vertical this will cost four dollars and five cents or four dollars and ten cents probably somewhere in between there and if I do to confirm and send this is a ten dollar wide so we can see where the potential gain is which is greater than that maximum loss now let’s see if now one other consideration I don’t see any other examples sometimes one may see weekly options which may have more strike prices or sometimes in the front month but with this being a more expensive stock looks like the ten dollars are a good example here and if I go to the charts so for this one to be at its maximum gain it’ll have to go below 380 which right now would be about nine points below where it is right now and if I go ahead and look at the breakeven for it the price would just have to be below 385.71 which is about $4 where it is right now now keep in mind you know as far as as far as with this stock you know three dollars or three to four dollars is only about a 1% move so not exactly a large move there I’m going to go ahead and we’ll do three contracts on this one that’ll be about 1200 that’s kind of similar to the position we did on the last one and as we can see what our potential maximum loss is 1287 maximum profit 1700 and there’s our commissions right there and let’s go ahead and edit and we’ll attempt to send that out and look so we went ahead and got that filled so we went ahead and we took care of 2 practice trades today let’s bring up the broad market as we get ready to go so hopefully you learn something new where we went ahead and did 2 long put verticals based off of a bearish breakout now we utilized support and resistance to look at potential price targets however in our examples we don’t even need it to trade down to that full target we’re just looking for it to go down moderately and if it goes down moderately we may have a profitable trade if it moves down strongly like with some of the other examples that we had closed out today then we may realize closer to that maximum gain so stay tuned for that as well manage these examples each and every week and would encourage you to practice them as well so as we look at the s&p 500 looks like the Bulls are still trying to step back in possibly forming that hammer formation we’ll see if that sticks with about another hour and 15 minutes to go folks and coming up next covered calls and cash secured puts I believe with my good friend Brent Moore’s so stay tuned everyone and remember in order to demonstrate the functionality of the platform we had to use actual symbols keeping in mind TD Ameritrade does not make recommendations or determine the suitability of any security or strategy through the use of our tools any investment decision you make in your self-directed account is solely your responsibility so have a great day everyone we’ll talk to you again real soon bye now [Music]

local_offerevent_note February 26, 2020

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