A key indicator that has proven very effective is showing a potential trade in SPY.
Each Thursday, I will focus on what SPY is doing, with the hope it will help give us a clue about the market’s upcoming moves. SPY or the SPDR S&P 500 trust is an exchange-traded fund which trades on the NYSE Arca under the symbol SPY.
The chart of the SPY below is a weekly chart with a TSI indicator at the bottom. The description coming up next explains how to use the TSI.
True Strength Indicator
The True Strength Index (TSI) is an oscillator that fluctuates between positive and negative territory. As with many momentum oscillators, the centerline defines the overall bias. The bulls have the momentum edge when TSI is positive, and the bears have the edge when it’s negative. As with MACD, a signal line can be applied to identify upturns and downturns. Signal line crossovers are, however, quite frequent and require further filtering with other techniques. Chartists can also look for bullish and bearish divergences to anticipate trend reversals; however, keep in mind that divergences can be misleading in a strong trend.
TSI is somewhat unique because it tracks the underlying price quite well. In other words, the oscillator can capture a sustained move in one direction or the other. The peaks and troughs in the oscillator often match the peaks and troughs in price. In this regard, chartists can draw trend lines and mark support/resistance levels using TSI. Line breaks as well as line crosses can then be used to generate signals.
TSI Buy Signal
Each candle on the chart represents price movement over one week. On the line indicator at the bottom of the chart, it appears that the TSI line is trying to turn up indicating a possible shift from bearish to bullish. The red line is still barely above the black. The candles for the past few weeks are red. We will look at buying Calls since a change seems to be happening, but it won’t be confirmed until the TSI crosses up.
Since the swings have been back and forth, trades may be shorter than what weekly charts often are traded. Watching the chart will help you decide if a Call or a Put trade is possible. You would not enter a Put unless price falls below $435 and a Call above $443. The short-term target for a Call is $450.
Potential Profit Play:
To buy shares of SPY today, they would cost approximately $443 per share (as I write this on Tuesday).
A benefit of option trading is that you can however make money with options when the market is going down or up.
For a possible Call trade, if you bought one Call option that covered 100 shares of SPY for the 450 strike it would cost about $5.85 for the May 20th expiration date (May 22 monthly expiration). This would be an investment of $595. If price rises the expected $7 you could expect to make approximately $4. This would be a $400 profit on your $595 investment or 67% profit in a short time.
Option trading is truly unique in its ability to give traders the opportunity to trade an equity’s price move in either direction. Since the TSI indicator is bearish but the candles are bullish you will want to watch price closely expecting the TSI to cross up.
I want to stress, when you trade options, you can close the trade anywhere along the line to take profit (or loss). You don’t have to wait until it hits the target or until expiration day. You also want to wait for the indicator confirmation and don’t jump-the-gun with an early entry.
Trading options can be a win, win, win opportunity. Options often offer a smaller overall investment, covering more shares of stock and potential for greater profits.
What’s Next? I Can Hardly Wait!
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Two weeks ago, the SPY price did not reach the target entry so no trade would have been placed.
Last week, we discussed a Put trade on the 440 strike with April 29th expiration and a premium of $583. On the 18th, premium rose to $8.02 or a gain of $218 or 38% in a few days. Tuesday, the 19th SPY’s price has started to rise.