Hi everyone, I hope you are enjoying the weekend so far.
Despite the index pushing towards all-time highs and giving us a worse risk/reward ratio for going long, I think we will continue to move higher until bearish sentiment drops.
In the weekly chart of SPY above, I’ve highlighted that we want to be selling near the top half of the range and buying near the bottom half. This is known as “buy low, sell high.”
Notice the current trading range from March lows to all time highs (220-335). If we want a trade with a minimum risk/reward ratio of 2:1, we want to sell in the upper third of this range, and buy in the lower third of the range. For example, a trade could be to short at 300 with a stop loss near 330 and a profit target at 240. For going long, we would look to buy near 250 with a stop near 220 and profit target near 310. Although I favor continued upside here, notice that we are in the upper 3rd of this trading range, so selling here from a risk/reward standpoint is reasonable. Again, although I’m bullish, the risk/reward makes it too risky to be buying at these levels. Selling out of the money puts with the intention of getting assigned would be a reasonable alternative.
LUV weekly chart below. I still have not taken a position in airline stocks. This bounce is quite juicy and probably a bait so I’m waiting for a retest of the previous lows (low 20s).
Notice the large gain this week (20%+).
Thank you for reading. Let’s see what happens this upcoming 4 day week.