Over the years, I’ve found that whether I’m teaching members, acting on the Market Navigator trade of the day, or teaching you through SPY Daily editions, there are always new lessons to learn in the market…
Today I’d like to teach you how I navigated Monday’s trade of the day and how I plan to proceed through the day ahead.
Before we get to today’s economic calendar and chart of the day, let’s think back to Monday’s edition of SPY Daily…
On Monday I referenced SPY’s 50-day simple moving average line as a critical support level for the day ahead, as SPY was trading right above it.
As you may recall, I was looking for a move to the upside to buy SPY Calls.
Monday’s chart of the day was the chart below, and the 50-day simple moving average line is the red line below.
Monday’s SPY Daily Chart
A lesson I want to cover with you today is the concept of reward-to-risk
You see, after having taught and traded options on the SPDR S&P 500 ETF (SPY) for five years and counting, while I love trading SPY to the upside and the downside, I’ve learned that sometimes, it’s best to sit on my hands with one particular direction.
In Monday’s case, had I wanted to buy SPY puts with SPY trading right above its 50-day simple moving average line, there was about $0.50 of downside room for reward, whereas there was potentially unlimited room to the upside for risk.
Inversely, given I wanted to buy SPY Calls, there was that $0.50 of downside risk with potentially unlimited upside reward.
I like to see a minimum ratio of 2:1 reward-to-risk, and in Monday’s case, this rule proved to be effective as I bought SPY Calls shortly after the opening bell.
Monday’s SPY 5-minute Chart
This is why I sat on my hands to the downside, and favored the upside.
Keep in mind, I trade SPY options, meaning my goal is to leverage a $3/share move on SPY by trading SPY Calls and Puts that trade at about $1 on any given day… not the $400+ one share of SPY would cost.
I’ll detail more of my recent trades during tonight’s 7 PM ET live session with you.
Ahead of today’s bell, an economic calendar can point out the Beige Book event at 2 PM ET.
The Federal Reserve’s Beige Book reports current economic conditions in each of the 12 Federal districts in the U.S. It gives a picture of economic trends and challenges in the U.S.
It is released eight times a year, two weeks before each Federal Open Market Committee meeting. The report is used by the FOMC in its decision on short-term interest rates.
An optimistic outlook is typically interpreted as bullish for the U.S. dollar, while a pessimistic outlook is typically interpreted as bearish for the U.S. dollar.
Ahead of the bell, SPY’s 60-minute chart, today’s chart of the day, has a volume profile read indicating 450.20 could be a strong support level. As I’m typing, SPY is trading at 450.59…
SPY 60-minute chart
Remember our lesson on reward-to-risk? That would allow me $0.39 of reward opportunity on a potential move to the downside, so I’m going to take a pass on playing the short side of things as long as SPY continues to trade above 450.20.
Should SPY continue to trade above 450.20 support today, I’ll be interested in trading SPY to the upside, and when I plan to make my move, I’ll be sure to give an advance alert to my Market Navigator members to let them know when I plan to make my move.
With this much education and detail laid out, it’s time for me to get to the trade of the day with members, but I’ll see you here at 7 PM ET…