This proven approach has spotted a potential 94% play. Let me explain.
Last week, the market was up 3 days out of 5 trading days.
Am going to call Thursday “SPY Day”. 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. SPDR is an acronym for the Standard & Poor’s Depositary Receipts, the former name of the ETF. It is designed to track the S&P 500 stock market index. This fund is the largest ETF in the world and gives a good overall picture of the market. SPY includes shares from the top 500 companies.
The chart of the S&P 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 Puts.
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 $441. The short term target is $430.
Potential Profit Play:
To buy shares of SPY today would cost approximately $442 per share (as I write this on Tuesday). You would wait until you thought it found a bottom before buying stock. You can however make money with options when the market is going down.
If you bought one Put option that covered 100 shares of SPY for the 440 strike it would cost about $5.83 for the April 29th expiration date. This would be an investment of $583. If price fell the expected $11 you could expect to make approximately $5.50. This would be a $550 profit on your $583 investment or 94% profit.
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 I will not be listing a potential trade this week.
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!
Keep an eye on your inbox and I will keep sharing what I have my eye on. If you want to get deeper into how I find these winners, be sure to check out the programs in the banners in this message to learn more about options.
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Yours for a prosperous future,
Last week the SPY price did not reach the target entry so no trade would have been placed.