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Coming into last Monday, there was a whole lot of fear in the market. The SPY was gapping down 2%, and everything on my screen was red. After doing my weekend reading, everyone was so freaking bearish! When market sentiment gets overwhelming one way, I like to fade it. We discussed that last week here.

I want to trade with the smart money, the algo’s. Now the algo’s are terminators, have no feelings, and are not scared to execute their trades. So while everyone in the Twitterverse is panicking, I get out my buy the dip (BTFD) playbook.

Buying The Dip

The SPY was gapping down due to renewed fears about the Covid-19 Delta variant and new cases of Monkey Pox. We mentioned that the market might not have been pricing in the Delta Variant a few weeks here . Well, we got that re-pricing on Monday with a gap down, and this presented us with an opportunity!

You see, the algo’s, the BTFD algo’s they don’t care about Monkey Pox. They care about the trend. And so far, every time the market corrects, it continues to go up. It corrects, it goes up. I understand that there are large funds on the sidelines ready to invest on days like this and I want to be able to participate in these opportunities with them.

Chart Analysis

If we look at the Chart of the SPY, we can see it opened at 426.19 and hit a low of 421.97. The 423 level was previously a significant area of resistance. Basic technical analysis tells us that this level, when tested, may become a potential area of support, which is what ended up happening.

Another way to look at the market when there is a major selloff or gap down is to ask yourself how many days’ work is this move erasing? Stocks go down much faster than they go up, and the more days of work a move erases, the higher the likelihood that the market will find buyers coming in from the sidelines.

Historically anything that undoes ten days of work or more is a place where buyers may appear. In this case, the gap down undid 17 days of work (almost a month). That is, we were at the same place now, as 17 days ago. This is a significant move and gave me added conviction to put in some buy orders for the BTFD trade.

Structuring The Trade

So coming into Monday, I knew I wanted to get long the market. But how would I structure such a trade? Here are my notes from Monday’s Total Alpha e-mail

This morning the iShares Russell 2000 ETF (IWM) traded down into a major support level with an oversold RSI value.

This pattern has set up only twice in the past going back to March and April, and I was expecting similar results for a short term bounce this morning.

In the blue highlighted sections, you can see that today the RSI was oversold and that IWM traded back into the support area.

The Invesco QQQ Trust (QQQ) is setting up for a different, but similar trade as the IWM above.

Like the IWM trade, I am looking for buyers to start to step into the stock around the 200 hourly support average with an oversold RSI value starting to appear.

Here was my trade plan:

As a trader, if you identified the place to buy on the dip near the 200 hourly moving average with an RSI reading under 30, you’ve only identified one out of three things needed for a trading plan.

You need to also identify a place for your stop-out in case the trade does not work, along with a place to exit your position.

In my case, I was going to allow the stock to trade to, but not below the 200 hourly moving average. Then for the target price, I was going to target the 13 hourly moving average, and then the 30 hourly moving average for places to exit my trade.

Here is an example trade plan that you could have used for this trade.

  • Enter near moving average with oversold RSI reading.
  • Stop below 200 hourly moving average
  • Target exit 1 : 13 hourly moving average
  • Target exit 2 : 30 hourly moving average

As it turns out, I was proven correct in my analysis. The SPY’s and the QQQ’s made a bottom on Monday and rocketed higher to make new highs by the end of the week. IWM, although it didn’t make new highs, also had a nice 12 point bounce.

The market agreed with my analysis and I had great trades in IWM and QQQ. The Bullseye trade of the week in LOW also worked to a T.

After a tough week the week before, I didn’t let fear get in the way of my trading and had some nice trades play out this week.

Bottom Line

I like to fade overwhelming market sentiment. When there is immense fear in the market that

quickly erases weeks of work, I am ready for the potential of a BTFD trade. I understand that there are large funds on the sidelines ready to invest on days like this and I want to be on the side of the smart money algo’s. I set up a trade plan and execute it without hesitation when the trade sets up. Days with extreme fear provide the potential for significant bounces in a bull market.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

I love trading options.

They allow me to define my risk and stay flexible while I let my trade idea play out. A great example is a trade I made in Snowflake INC (SNOW) a few weeks back and managed this week.

I’m excited to explain how I used call options to put myself in a position of strength in a working trade.

And how I was able to button up some risk, while keeping the trade alive. It’s not a strategy I apply often, but given how this trade has gone according to plan, I will start doing more of these.

Defining Risk

A huge part of trading is managing risk. Often beginner traders ask themselves, “how much can I make on a trade”?. They figure out how much they want to make and click the buy or sell button. Professional traders approach trading by doing the opposite. They ask themselves, “What is my Risk?”, “What can go wrong?” and plan accordingly.

The reason is simple, every seasoned Trader I know has been through the baptism of fire. They’ve made mistakes, taken crushing losses, and understand that the only way to survive in this game long term is to focus on managing downside risk.

This is one of the reasons that, for the most part, I like to structure my trade ideas using options. They allow me to define my risk before I enter a trade, not only that they give me the flexibility to manage my position while a trade is working. Guess what? They give me options, pun intended.

Let’s take a look at a trade I made in SNOW over the last couple of weeks and how I managed my trade using options to put myself in a position of strength.

The SNOW Trade

After bottoming out at $190 falling 57% from its high of $428 SNOW began to stabilize in June, consolidating around the $240 area. $240 had been a prior area of resistance, but now this level was finding buyers becoming a potential area of support.

In addition, the 200 hour moving average was curling up, and the anchored VWAP since the $190 level had become support. SNOW tested the anchored VWAP on three occasions, and each time buyers came in with force.

Technically to me this trade idea had everything I like in a trade. Strong up move, consolidation with support. I also like the fundamentals of the company and given the recent strength in the SPY and QQQ’s I thought SNOW had the potential to go higher and that this was a great spot to get in.

Given all of the above, I had more conviction on this trade than usual. When I have added conviction, I like to buy calls outright instead of selling put spreads, my typical bread, and butter strategy. So, I started buying the $280 calls for a premium of $3.40.

As it turned out, I had a great read on this stock, and my thesis was proven correct, SNOW moved higher. It moved from the $240 level to as high as $275. Now I had a decision to make. Do I take some off the table here? Do I let the rest of my trade ride for a move higher, risking the premium I laid out?

As a professional Trader I always want to be approaching my trading decisions from a position of strength. I think that SNOW can move higher and want to let the trade play out because I believe in being ready for good opportunities. As the great Jesse Livermore once said, “The money is in the sitting, not trading.” At the same time, I want to reduce my risk as much as possible.

So I opened up the options chain to literally have a look at what my options were. Due to the up move, I noticed the $300 calls in SNOW were now selling for $3.10. By selling these options and receiving $3.10 in premium I now have a call spread that overall cost me only 30c ($3.40 paid minus $3.10 received).

To recap, I am now long the $280 calls and short the $300 calls for a cost of 30c. That’s $20 of upside for only 30c of risk and a Reward/Risk ratio of 66 to 1. That is what I call trading from a position of strength and giving myself an edge in the markets.

There are still a few weeks left for this trade to play out, but I have significantly reduced my risk and have a lot of potential upside. This is why I love trading options.

Bottom Line

Managing risk is one of my most important jobs as a trader. That is why I love using advanced options strategies. My risk is always defined, and I can stay flexible when managing my position throughout the course of a trade.

As was explained by my trade in SNOW from a few weeks back, I try to limit my downside and get ready for good opportunities. These types of skewed risk/reward setups allow professional traders to be in a good position over the long term.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

Trading is a very competitive business. There are so many different types of market participants; pension funds, institutional investors, momentum funds, hedge funds, algorithmic traders, day traders, prop traders, and retail traders are all competing against each other to succeed.

For me to ensure my trades go according to plan, I don’t just trade chart patterns or moving average crossovers. That is not enough for me. I try to understand where the majority of these market participants may be positioned in any particular stock.

Understanding market sentiment helps me find unique opportunities to bet against the crowd. Today we will discuss how to do just that.

Why Market Sentiment is Important

I read a lot to understand what is happening in the economy, the business climate, and the world. I use Twitter and Reddit to get a feel for sentiment and hot market stocks. I try to understand the story behind what’s going on and where certain players are positioned.

I do this because I understand there are large institutions out there with billions of dollars who employ hundreds of people with Ph.D. s looking for and creating algorithms with an edge. A lot of these quants are behind short term momentum and they are also looking at market sentiment to understand where retail traders may be positioned.

These algorithms understand where the pain points are for traders, where their stops may be, and what will move prices to shake retail traders out of positions. When a trade is crowded, funds who pay millions for this broker data will look for blood.

This will happen whether a trade is short-crowded for example TSLA, GME, AMC, or long-crowded, for example certain SPACs such as FSR or CLOV. So, I try to understand the sentiment of who may be positioned where to understand what the smart money and market makers may do going forward.

Retail traders and Wall Street Bets Apes have dreams of Lambos and yachts but with no real trading strategy except for “hold the line” and “short squeeze.” When the time is right and my setup is there, I want to make trades that go according to my plan, fading these pipe dreams because I know the market is serious business and will crush unprepared market participants.

Roblox Setup

Roblox (RBLX) was a hot IPO from back in March 2021. It is a platform that allows users to explore 3D digital worlds and allows developers to create, build, publish and operate 3D experiences. The platform grew users a lot during the lockdown, and even my kids played it.

The hype around it on social media was immense, and there was a nice opportunity on the long side post the IPO from $60-$80 to $100 but when this stock failed at $100, I was aware that there may be an opportunity to the short side setting up.

Having failed to hold above $100, RBLX found support at $80 in late June. But coming into July, it had made a lower high at $93 and was consolidating in the $86 area. I prefer to trade the chart, not the news.

I was aware that this is a very hyped stock. A lot of traders bought the dip above $80, hoping this stock would bust through $100 and go to the moon. RBLX is a known investment of Cathie Wood of TSLA fame in her fund ArkInvest. Rather than listen to the hype, I prefer to listen to what the market is telling me.

The last couple of weeks, small-cap tech stocks were doing terrible, I knew this because I was in some of them. While QQQs and large-cap stocks were marching higher, the smaller-cap stocks were selling off. I was also expecting some market jitters due to the Covid-19 Delta variant. Putting all of these things into context RBLX had set up perfectly for a short.

There was so much bullish market sentiment about the stock. But the chart was telling me something different, it failed at $100, it failed at $93 and now was holding at $86 below the VWAP from the highs. When there is overwhelming bullish market sentiment in a stock that is not necessarily a good thing for very long, I prefer to fade these types of situations.

As we can see, once RBLX failed to get above $90 and broke below $85, that was all she wrote. There was prior support at $80, and we broke through that, presumably stopping out a lot of traders for a move to $76. This is a perfect example of fading sentiment and listening to the chart.

I spoke about this trade in the Master’s Club last week. Unfortunately, my working order to sell a call spread did not get filled. I stayed disciplined and didn’t chase the stock. It was a missed trade, but the logic was correct. This is the type of thinking required by professional traders.

Bottom Line

Thinking like a professional trader is important to be prepared for trading setups. This is why I try to understand market sentiment in a particular stock or the market as a whole. Overwhelming market sentiment one way in a stock is not necessarily a good thing for very long.

Understanding that large funds also trade around this concept with their algorithms, I try to fade overwhelming market sentiment when this particular trade sets up. I want to understand where the majority of participants in a stock are wrong and use this intuition and information to be ready for great trade setups. Hope is not a trading strategy.

Author: Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.