It was a short week for stocks, due to the MLK holiday, and the market finally took a breather from its record-setting rally.
The coronavirus made headlines this week, after originating in China ahead of today’s Lunar New Year celebration.
Outbreak concerns sent oil prices reeling, as investors fear an aversion to travel will weigh on fuel demand.
Meanwhile, the Shanghai Composite on Thursday suffered its biggest one-day drop since May, as Chinese stocks tanked.
However, the pullback wasn’t all bad…
By using a pair of underutilized moving averages, my Weekly Windfalls subscribers saw me make a cool $7,000 IN LESS THAN 24 HOURS on “the Amazon of China.”
And my Smoke Signals members didn’t do too shabby, either…
Some people will tell you that you should turn your weaknesses into strengths if you want to excel at trading.
That’s bad advice in my opinion.
The market is just too complex… too big… for anyone to become a jack of all trades.
Instead, eliminate what’s not working for you entirely.
This will stop the bleeding.
After that—focus only on your strengths.
Today’s lesson is all about breaking down my WINNING trades from this week.
Learn from them, and soon, you too will be able to replicate them and churn out consistent profits.
Chinese Stocks Suffered Ahead of Holiday
The coronavirus originated in China, and infections have ramped up ahead of today’s Lunar New Year holiday.
The Shanghai Composite sank 2.8% in one day Thursday, while Hong Kong’s Hang Seng Index fell more than 400 points.
As a result, China-based stocks in the U.S. also fell… including “the Amazon of China,” Alibaba (BABA).
It just so happens that I spotted some weakness in BABA shares late Wednesday.
Just before the close of trading, I alerted my paid Weekly Windfalls members to this:
Due to earnings risk next week, I implemented a BEAR CALL SPREAD on BABA shares using options that expired on Friday.
Breaking Down the Trade
Specifically, with the stock trading right around $222, I:
- Sold weekly 222.50-strike calls, as I believed BABA would stay below that level
- Bought weekly 225-strike calls, to minimize my risk in case the stock moved against me
Since I received more money from selling the lower-strike calls than I paid to buy the higher-strike calls, the spread was established for a net credit of 97 cents.
And since each option controls 100 shares of BABA, and I trade 100 options at a time, my credit was $9,700.
That’s the MOST I could’ve made on the trade if Alibaba stock sank into the weekend.
Meanwhile, my risk was $15,300, which is the difference between the sold and bought strikes (2.50) minus the net credit (0.97), times 100 shares per contract, times 100 contracts.
That’s what I would’ve lost if BABA shot higher above $225 (my bought call strike) before I closed out the trade.
But guess what, guys and gals?
THAT DIDN’T HAPPEN.
In fact, early Thursday morning, here’s what I told my paid subscribers:
And then, not long after that, I pulled the trigger for a huge windfall!
Guys and gals — I made $7,000 on this BABA trade in a matter of just a few trading hours, capturing about 80% of the total possible premium!
I wasn’t the only one, either…
Check out a couple of the messages I received shortly after:
These folks pulled the trigger. What are YOU waiting for?
2 Moving Averages for Momentum Traders
If you didn’t notice, I cited a couple of under-the-radar trendlines in my Alibaba emails: the 8-day and 21-day exponential moving averages (EMAs).
Now, before we get into BABA, specifically, let’s talk a little about trendlines.
A moving average basically reduces the day-to-day noise of a stock’s trajectory over a period of time.
It will appear as another line on the charts, and can often emerge as areas of support or resistance for an equity.
That’s because many traders use trendlines as levels at which to buy or sell a stock.
There are two types of moving averages: simple and exponential.
A simple moving average (SMA) is basically a straightforward average of the stock’s price over a certain timeframe.
The 50-day and 200-day SMAs are two of the most popular trendlines watched on Wall Street.
You can see why with a look at this Dominion Energy (D) chart.
An exponential moving average (EMA) gives more weight to recent price action, so it changes directions faster and is often used as a momentum indicator.
EMAs are often used by day traders or short-term traders like me.
Two that I watch frequently are the 8-day and 21-day EMAs.
Those numbers sound arbitrary, don’t they?
Well, there are a couple reasons that many traders look at those particular EMAs; one is the Fibonacci sequence.
In addition, the 21-day EMA is really the middle Bollinger Band.
So, if you think about mean-reversion, this trendline often acts as a good BTFD (Buy The Friggin’ Dip) zone.
However, keep in mind that these EMAs are best used when there’s a strong trend in place.
For instance, with Apple (AAPL)… See how the stock keeps riding the 8-day EMA? It’s not even close to the 21-day.
Now, on to how I’ve utilized these moving averages to make cheddar.
Spotting the BABA Setup
As you could see from my Wednesday Weekly Windfalls alert above, Alibaba shares broke below their 8-day EMA, which caught my attention.
The stock was trading below this trendline for the third time in four sessions, and I thought the weakness could be a sign it would drift down to its 21-day EMA.
And sure enough, it did.
In closing, guys and gals, there are hundreds — if not thousands — of indicators that stock and options traders use to find sweet setups.
But those looking to get in and out of trades quickly should consider putting the 8-day and 21-day EMAs into practice.