Identifying high probability directional trades early after a market drop. Part I

One of the most difficult time for a directional options trader is when a market turns quickly.

We have written before (And those who have attended our options trading rooms – seen in action), how to reduce positions as the market begins to look as though it may turn over (either a long to short bias or equally short to long). So what next?

The Hawkeye Fatboy indicator is a powerful tool that is suited to such circumstances.

There are two ways you can utilize this, and in this first part of two we are going to focus on identifying the high probability sector movements in sectors which then can be potentially traded as ETFs.

In the second part, in a couple of days time, we will explore how to use this information and the same powerful Hawkeye instrument to hone down on the stocks within  a sector that could be about to fire.

The Hawkeye Fatboy Indicator

This indicator can be used for trading Stocks, Options,  and Commodities and has the purpose of comparing six stocks (or ETFs/futures/commodities/indices) as to whether they may be overbought/sold and due a trend change. In this context we are comparing sector ETFs versus the S&P500 as a whole.

It is used as PART of the entry process as is opened as a separate, independent chart.

It must only compare like versus like (e.g. six stocks, futures OR indices within the same chart – you cannot mix these types of instrument).

What we are looking for is those that are at the extremities of strength or weakness as these are areas where markets often turn giving high probability and lower risk entries.

We wait for evidence of a turn on Fatboy and, once identified, we can then look at the chart of the individual instrument to determine if entry criteria are met before taking action.

The Fatboy is merely a way to determine where opportunities may exist and NOT an indicator on which to take trading action.

With the recent market pullback last week, we are looking across the most liquid optionable ETF’s for opportunities that some buying pressure is moving into any sector despite the index performance as a whole.

In the chart, you see the Fatboy in action. there are 6 lines, the red dashed line being the SPY, and the other 5 being sector ETF’s, namely

  • XME (Metals and mining)– Green
  • XLF – (Financials) Yellow
  • XLU – (utilities) Light Blue
  • XHB – (Home builders) – purple
  • XRT – (Retail) – Dark blue

 

As we see from the chart most of the lines representing the aforementioned have topped out and turned downwards to match that of the SPY.fatboy XLU

There is one obvious exception to this with the light blue line (or XLU) now turned upwards in the opposite direction. This is suggestive of an early turn in this sector compared to the others and of course most importantly the index as a whole. This gives us the evidence to suggest a potentially high probability “long” trade.

 

Of course , as previously stated, this is not a trade entry signal in isolation, we must then check charts across our three chosen time-frames..in the case of XLU see the diagram below which confirmed a bought Call trade in the Hawkeye portfolio. There is a new uptrend in the underlying on the daily chart, a break through an identified critical price level at $41, and of and most essentially buying volume. Entry confirmed on the weekly and monthly charts

xlu18032

 

For those interested in learning how Hawkeye can Optimize YOUR results …(we do have a return of 160% on the directional options portfolio since October!) drop us a line at mike@hawkeyetraders.com and of course enroll for our next FREE trading room (http://hawkeyeoptions.com/room/).

Trade safe!!

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