My All-Time Most Favorited Email — It Will SAVE You Money!
Dear Webinar
I run this email every time there’s the threat of a negative momentum event. What I mean is that we have three straight days of falling buying pressure. We had that happen Wednesday.
It doesn’t mean that momentum will go red just yet. We could have a buy-the-dip rally that’s been the norm of 2023. But if we’re on the verge of a big correction, I need you to be prepared.
So… that is the subject of today’s lesson.
What to do if momentum goes negative in the next week.
Right now, you should be tightening your stops, moving your chair closer to the exits, and watching key technical levels for the S&P 500 and Nasdaq 100. But let’s go beyond that today... Let’s learn how to properly trade momentum.
These are your six rules for negative momentum.
Rule 1: Cash Is Your Best Friend
I move to cash when momentum turns negative. I know that sounds crazy. I sell everything? Well, I don’t sell everything in my retirement account.
But my trading account? Yes… I move to heavy cash.
I’m out of long positions, and I position my cash for buying opportunities.
Since I’m an active trader and investor, I focus on key technicals that allow me to focus on new entry points. The move to negative momentum is very important as I protect as much capital on the balance sheet as possible. This is how I can buy for a dollar and sell for two dollars multiple times a year.
Rule 2: Don’t Sell Puts, Unless… See Rule 6
If I find myself selling put spreads as an entry point, now is not the time for me to open new positions… If I sold previous cash-secured puts or put spreads, I entered this with the mindset that I was willing to buy the stock at a lower price. If I’m up on my current position, now would be a good time to take profits. If I’m down, now might be the time to assess whether I want to sell spreads at an even lower price.
When momentum goes negative, selling can be indiscriminate. That means nothing is safe. The last thing I would want to do is have exposure to a $50 put when the downside for a stock is much lower.
Rule 3: Learn Implied Volatility Rank
One of the great rules that I learned from my time with Tastytrade was how to know the difference between cheap and expensive options. I use a tool on tastyworks called Implied Volatility Rank (IVR). This measures the implied volatility of a stock TODAY compared to its IV during the previous 52 weeks of the year.
If a stock has an IVR of 25, its implied volatility is lower than the 75% of the trading days over the past year. If it’s at 80, that means it’s higher than 80% of the days in the past year. The general rule is that if IVR is under 25, it’s cheap to buy calls or puts. If it’s over 30, I might want to sell calls and puts. And if it’s really elevated, that’s the time for me to do exotic trades like iron condors. This can also tell me which stock to trade, and how to trade it compared to other ideas.
Rule 4: Sell Credit Spreads in Negative Momentum
If a stock is expensive to short with a long put, there are other “options.” I can sell vertical call spreads on stocks with a high IVR, and benefit if the stock trades sideways or declines in value. I’d be selling someone the right to purchase a stock from me at a higher price. If the stock price falls, the underlying call will fall as well, thereby reducing the value of the call spread.
I use a higher call on the trade to protect myself against any surprise upside on a stock — think a buyout or sudden momentum reversal. Rule 5: Look for Oversold Levels on the SPY and IWM
Rule 5: Look for Oversold Levels on the SPY and IWM
Finally, the market tends to sell off fast and furious in negative momentum environments. From June 8, 2022, the S&P 500 ETF SPY went from overbought to oversold in about seven trading days. Following the SPY’s move on the Relative Strength Index (RSI) to under 30, the market was oversold. Oddly enough, no one had the guts to buy stocks.
Want to know who purchased shares in oversold conditions and made a fortune? Robots.
Algorithms — which have no emotion or fear — scooped up stocks in deeply oversold conditions and kept buying for a month. The market’s momentum didn’t turn positive for a month — until July 18 — but low-volume buying produced terrific gains for investors.
Rule 6: Wait… Sell Puts in Very Specific Conditions
The oversold territory is also a very good place to sell puts on stocks I want to own when we’ve reached a period of “peak fear.” If the RSI on a stock is at 25, and it’s a great blue-chip company, I use the high volatility and the fear to sell puts on a stock maybe 15% to 20% lower than its current level.
If the stock does fall to that point, I’ll have an absolute bargain. But if the stock rebounds from overbought, I can repurchase the option for less and pocket the difference.
With that, I’m ready for battle. It’s time to trade momentum.
To your wealth,
Garrett Baldwin
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
*The profits and performance shown are not typical, and you may lose money. From 2/21/20 to 5/11/23 on live trades the win rate is 66%, the average return of winners and losers is 12.9%. The average winner is 52.8% on the options over a 7 day average hold time, with a total annualized return of 125%.
Market Momentum is Green
Momentum is positive, but buying pressure is falling. That’s typically a signal that we might see a possible reversal very soon. Do not tell me that you were not prepared.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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