So far, December trading has gotten off to a choppy start, which I think has come as a bit surprising to some traders.

Why?

Because December usually plays host to some of the most bullish trading of the year, as the market typically bids prices higher to reflect the improved spending that comes with the holiday shopping season and manifests in the stock market as something known as the “Santa Claus Rally.”  

While December does indeed have a strong seasonal track record, Figure 1 below shows that it’s usually the 2nd half of the month where the benchmark S&P 500 witnesses the best gains, after a turbulent first half of trading.

Specifically, what you are looking at on the chart below is the average performance of the S&P 500, broken down by month, over the past 20 years.

Figure 1

For Total Alpha members, however, the market’s recent downturn has not come as a surprise, since I’ve been taking on far fewer long positions over the past couple of weeks in anticipation of this increased market weakness.

In addition, as recently as this past week, I have been shorting the Nasdaq 100 ETF (QQQ) using a bearish options trade known as a “credit call spread.”

But even in the strongest downtrends, stocks occasionally bounce.

You see, just like in nature, stocks never move in a perfectly straight line.

Sure, parabolic rallies and precipitous sell-offs often occur.

But during these strong moves, you’re almost always going to have brief periods where the stock price pauses before the sharp move that preceded it resumes.

Because of this, I alerted members to plan for an end-of-week bounce in shares of DoorDash Inc. (DASH).

According to Yahoo Finance, DoorDash, Inc. operates a logistics platform that connects merchants, consumers, and dashers in the United States and internationally. It operates DoorDash marketplace, which provides an array of services that enable merchants to solve mission-critical challenges, such as customer acquisition, delivery, insights and analytics, merchandising, payment processing, and customer support; and offers DoorDash Drive, a white-label logistics service; DoorDash Storefront that enables merchants to offer consumers on-demand access to e-commerce. The company was formerly known as Palo Alto Delivery Inc. and changed its name to DoorDash, Inc. in 2015. DoorDash, Inc. was founded in 2013 and is headquartered in San Francisco, California.

Teachable moment:

To become a better trader, you need to train your eyes to identify strong areas of support and resistance on a price chart, so that you can better understand where your best odds of finding a good entry point for your trade will be located.

If we’re strictly talking about price levels and excluding other forms of support or resistance like Fibonacci retracement levels or moving averages, these key levels usually result from trading being concentrated around a certain price level over an extended period of time.

When it comes to shares of DASH, Figure 2 reveals that the level where price action seemed to be concentrating over the past few months is in the $160 area.

Figure 2

From the chart, you’ll notice that back in the middle of June shares of DASH broke above resistance at the late-April pivot high, then, at the end of July, used that former resistance level as support.

This phenomenon of using former resistance as support in an uptrend is known as “polarity,” a principle that lies at the core of the technical analysis. It also takes place during downtrends, where traders use former support as a resistance.

Armed with this information, I decided to try to play for a brief bounce in DASH shares by placing a bullish “credit put spread” right in this buy zone.

As I always do, I shared the details of this trade from my trading account with members, and that graphic is shown in Figure 3 below.

Figure 3

From this graphic, you’ll see that I Sold to Open (STO) the Dec 10 165 Put for $6.33 and Bought to Open (BTO) the Dec 160 Put for $4.33.

These “credit spreads” are Theta decay trades that benefit from the passage of time and do not require that the share price rally aggressively in a short period of time, as would be the case if I just purchased straight calls.

Unfortunately, not all trades work in our favor.

In this case, unrelenting end-of-week market weakness dragged a lot of names lower, and with QQQ hitting the 380 area on Friday I viewed DASH’s inability to get back above the protective leg of this trade (the $160 that I purchased) on Friday as an indication that it’s time for me to close the trade for a small loss.

Teachable moment:

Just like any other options trade, I am not required to hold these spread trades all the way through to expiration.

That’s why I was nimble on Friday, deciding to take a small loss on the DASH trade.

Look, as I have been saying for the past several days, I just don’t trust this market right now.

Never be ashamed to trust your gut, and right now my gut is telling me it’s not worth holding this losing trade until it possibly becomes a larger loss.

The trade was only meant to capture a small bounce anyway, so please use this example as a lesson that taking losses when they are small is never a bad thing.

To YOUR Success!