I “SPY” a New Trading Pattern

Last week we talked about the anticipated Summer Rally that I’ve identified based on background information on the last 10 years of data between Memorial Day and July 4th.

As I mentioned, over the past years as we pushed through Memorial Day into mid-July, the US stock market got a nice little “lift.”

The reasons are varied, but generally this is because there is very little in the way of corporate earnings releases, and very few surprises coming out of Washington. And no news out of DC is great news for Wall Street.

I want to bring you up to date on what’s happened since last week, and give you the “skinny” on an “inside pattern” that delivered a juicy 63% return…

This Pattern “Swings”

Let’s start by taking a look at the SPDR S&P 500 ETF Trust (NYSEArca:SPY) chart from last week in detail, and see where we ended up through June 15.

This daily chart of the SPY tells me that in the last few months we have had a few pullbacks in the SPY.

But what catches my eyes is a short-term pattern I’ve identified in the chart that has a very good long-term track record.

It is what I refer to as a “swing” pattern. Basically what we are doing is looking to catch a falling stock before it rebounds…

And I look at pullbacks into 10-day lows as possible entry points.

In both May and June, we had this occurrence result in higher prices, but you have to act fast with a swing trade. Indeed, it’s a one-week trade at best, and the problem with trying to catch falling stocks is that you are at the mercy of any volatility in that stock.

Trading swing patterns in individual stocks is risky business, but with ETFs like the SPY you have diversity on your side.

So What Am I Doing?

I am looking for 10-day lows in index markets such as the DOW and S&P 500. That is my buy signal.

Now there is a lot more to the “swing” system, including what to do if the index keeps dropping, if and when to add to positions, and when to sell, but the foundation of the entries are 10-day lows.

So how good is the track record on catching a falling ETF like the SPY? Here’s a summary of the last six years of trades, which were backtested using a 10-day low.

 As you can see, since 2009 there have been 134 trades taken off 10-day lows, of which 106 were winners and 28 were losers. That comes out to 79% accuracy.

How can it be that a system this easy has such a winning track record?

Well, since 2009, markets have basically been moving higher, so there’s no bear market to check this against in the last six years. Also, there is a lot more to these gains based on various exits to this method.

I have one below that I want to share with you.

What I’ve learned with swing trading methods is that the longer you’re in a swing trade, the greater the chance of a LOSS.

So remember: swing trades are short-term in nature, and I have just the way to force you out of a trade quickly, before taking a loss, using options.

Take a look at the most recent 10-day low that occurred last week in the SPY, and how using options got you in and out for a huge gain.

As you can see above, on June 8th the SPY hit a 10-day low. Rather than buying 100 shares of SPY for $205 a share, let’s look at what the weekly options offered instead.

In this case, the June 12, 2015 205 calls at $3.89 per contract cost $389 out of pocket.

Keep in mind we are forced to exit this trade quickly because there are only four days (June 8-12) on this option.

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Let’s Take the Money and Run

Now look at the following graph that shows the trade in a fast-forward by two days, and look at the return that we get.

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The SPY goes up three points ($3.00), so anyone who bought 100 shares of the SPY saw a $300 profit on a cost of just over $20,000.

However, the options trader saw a profit of $245, as his $389 investment went up 63%.

So options not only play a role in lowering cost and risk, but when used properly, they also offer an exit strategy by forcing us to make quick decisions, and at the same time, keep within our trading plans when it comes to entry and exit timeframes.

Until next time,

Tom Gentile

Americas #1 Trader

3 Responses to “I “SPY” a New Trading Pattern”

  1. Tom:

    This is great. I studied swing trades some time ago and I most probably would have missed this one. However, and just for clarification if you please Sir. (And please don’t take this the wrong way as I’m still and always trying to learn from the masters.) Are you saying that this swing move is one of your trade selection identifiers or recommendation for an actual trade? I was under the impression from your early posts that your criteria was for a 90% probability of a win and not the 79%.

    Again, GREAT Stuff!

    Best Regards;

  2. Hello, Tom, thank you for all the wonderful recommendations. But my problem is I can not trade strangle option in Scottrade. I have searched around and still not found any good place. Even the OptionExpress I saw from your training material doesn’t offer the service. Would you tell me which where or how to find a firm who allow trading strangle options?

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