Reversal and Bounce Patterns | Barbara Armstrong | 8-19-19 | Technically Speaking

Articles


Well, good morning, good
afternoon, or good evening, depending on what time you’re
tuning into this webcast. If you are joining
me live today, I’d like to thank
you for joining me. I am obviously
not John McNichol, but I’m filling in for John
today on this beautiful Monday, August 19. My name is Barbara Armstrong. And today, we are talking
reversals and bounce patterns. So this is an
intermediate level class. So my assumption
is that you have the basics of
technical analysis, you have the basics
of stock investing, and you have the basics
on options trading. And if you don’t
have those, I’ll show you some classes
where you can go or webcasts where you can
go and hone those skills. Feel free to continue
to join us today, but it may be a wee bit like
drinking out of a fire hose. So let’s get right
down to business. We have a lot to cover in 45
minutes together this morning. [MUSIC PLAYING] All right. Oh, looks like our outro reel– sorry, I just want
to bring this up so I can make sure I can see
what’s going on our screens. OK. So today, our objective is
to look at bounce patterns. And bounce patterns are a
form of reversal patterns. There is a lot setting
up on the charts today. And the goal today is to
make you more comfortable in recognizing bounce patterns,
specifically the W pattern. And we’ll see a lot of
those on the charts today. So I do also like this
to be interactive, so what we’re going
to do is we’re going to go through
some charts, we’re going to identify some
W patterns setting up, some that aren’t quite complete
and some that perhaps are. We’re going to place
some example trades in our paperMoney account. And at the end of
it, you should feel more comfortable in being
able to go through the charts and see these
patterns setting up. So that’s what we have
on board for today. Let’s get through our
important information, and then we can get
right down to business. OK. Options are not suitable
for all investors, as there are special risks
inherent to options trading that may expose
investors to potentially rapid and substantial losses. Spreads, straddles, and other
multi-leg option strategies can entail more substantial
transaction costs. So we have to take
that into account. And advanced options
strategies often involve greater or more complex
risk than a single leg option strategy. Trades involving minimal
potential benefit can be more significantly
impacted by transaction costs. In order to demonstrate the
functionality of the platform, we need to use actual symbols. We will look at lots today. However, TD Ameritrade nor
myself make recommendations, nor can we begin to determine
the suitability of any security or strategy for an
individual trader. We have no idea what’s already
going on in your account, what your goals are. So any investment
decision you make in your self-directed account
is solely your responsibility. Know that the paperMoney
application is for educational purposes only. So successful trading
during one time period doesn’t guarantee successful
investing of actual funds during another time period
because market conditions continue to change. And know that probability
analysis results shown, such as the probability of an
option expiring in the money or out of the money, these
are theoretical in nature. They’re not guaranteed. And as those of you who’ve been
trading for a while have seen, those numbers can
change day to day. So that’s that. Thank you to Mr.
Guterrez-Lee for chiming in this morning, and Reggie
Sharma, and Carnel Righten. Please feel free to type
a greeting into the chat. We do very much have
a sense of community here at TD Ameritrade. So feel free to greet
one another and greet me. If you have any
questions as we go along, please do not hesitate to ask. We had interns here
with us for the summer, and one of the things that we
heard back from the interns was that they were
often really grateful when there were questions
that came up in the chat because they had the
same question also. They just were a little
nervous about typing in a bunch of questions. So chances are, if
you’ve got a question, there are others that
have the same question. So good morning, Tom. Thanks for joining us. These before you are the Greeks. And, no, we don’t have to
learn another language. Well, I guess we kind of do. There is a lot of
lingo that wraps itself around this wonderful
world of trading. And for those of you who
are at an intermediate level and you’ve been doing
this for a while, you’re pretty familiar
with support and resistance and candlestick patterns and
haramis and dojis and hammers and all of the
terminology that we use. And delta, gamma, vega,
and theta are part of that, and these are the
Greeks that tell us how price, time, and
volatility can potentially impact our option trading. So although we don’t
have to learn Greek, there are a lot of terms that
we do become familiar with. But it’s amazing how
much we all have learned. And just for those of you
who don’t know my story, I joined TD Ameritrade
in 2011 as a client. And the reason I
joined was because I wanted to be able
to take advantage of all this amazing education
that this company offers. I didn’t anticipate being on
the other side of the camera, and yet, here I am and very
passionate about helping people figure this stuff out. OK. So let’s get over to the
Thinkorswim platform. We’ve got our fruity friend,
Apple, for those of you who were Forrest Gump fans. And Apple has a pattern,
the likes of which we will see many times. So what I’d like to do for
this to be more interactive is if you see a pattern and
you believe it’s complete or you see a pattern,
type into the chat what you think the pattern is. And then if you think that it’s
reached a point where the trade setup is complete,
just type a CN. Does that make sense for those
of you who are with us live? And if you’re listening to the
archive, as hundreds of people do, you won’t be able
to do that piece of it. But you know what,
that’s totally OK. So when we come and
we look at this– just let me come over here. I’m going to drag this over. One of the things we’re
seeing here on Apple is this W pattern. And for some
investors or traders, their rule is that
they want it to come above this midpoint in the V.
And so that is exactly what we have happening on Apple today. And then for some, they’ll
want to come down and look here at the map D and just see,
do we have a divergence? Or is this just going
along with the stock and we don’t have a divergence on this? So that might be
confirmation that what’s showing on the charts is valid. So with this, if we say,
OK, it’s come above. So what could we do with this? Well, some investors may just
want to buy in on the stock. Some might say, well, this is
breaking out above this point, so we could look at doing
perhaps a debit spread on this if we wanted to be
more conservative. So what is a debit spread? And I know many of
you already know this, as this is an
intermediate level class. But a debit spread sets– where we would be setting
up a potential debit spread is we are buying a
call at the money, and then we are selling
a call above that. Why? Because it will cap
our potential gain, but it also is an affordable
way to trade a stock that some consider to be a bit expensive,
as it is over $200 a share. Today it’s trading at $211.83. So this is a way that
if we were expecting this to perhaps continue to
go up to a previous high, that we might be
able to enjoy being able to trade a stock
that one might not be able to trade otherwise. Or if you’re not sure of how
bullish this stock might be, it’s a way to say, well– some investors might
look at this and say, one could expect that it could
come up to $220, not sure how far it’ll go above that. So let’s come to the Trade
tab and we can have a look. And one of the things we want
to look at is, when is earnings? So we just got by earnings. So if we said, well, we could
see this potentially moving in the next week through
both our targets– and one of the things when
we look at, as you know, time frame– when we look at
time frame, it can be both a blessing and a curse. We’re going to pay more
if we go further out, but then there’s more
opportunity to gain. And somebody has
typed into the chat that they did a bull
put spread, or it’s also called a short put vertical. Because why give something only
one name when we can give it two or three, right? Yeah. And so what some may have done–
and we’ll look at these today, so, Reggie, thank you
for bringing that up, is when something
is just setting up this V pattern,
that’s when there is more likely to be a tradeable
bull put or short put vertical. But when it’s broken out above– so you would have
the opportunity maybe if you wanted to do a
short put vertical of looking at something below this line. But if we wanted to
do a debit spread, we’d be coming over
to the call side and we’d be looking at
something that’s at the money. And do we have volume here? Yes, we do. If we look at this, we’re over
5,000 contracts today alone on the $210, 1,000
on the $212.50. You’ll notice that the volume
when we go to the $0.50 ending strikes is going
to be a lot lower. And so one might say, well,
I’d be OK with buying the $210, but you’re already
$2 into the money. So if we have
1,000 contracts, we can say, OK, let’s look
at buying a vertical. And so how do we experience
our max gain on this? Well, if it goes above $215,
we’ve got our max gain. And what’s our max gain is the
difference between the strike, so the $2.50 minus the $1.25
we’re paying to get in. So it’s about a one to one. We’re risking $1.25 to
potentially make $2.50. And if we hit Confirm
and Send here, we’ll see that our max
profit on this is $123 and our max loss on this
is potentially $127. So if we were willing to
risk $1,000 on a trade, we could come over
here and say, OK– I don’t know why I can’t
get– oh, you know why? Sorry. Let’s come over here to Edit. If I have 1,000 divided by– was it $127? We could do 7.8 contracts. So if we said, OK, we’ll
do seven contracts, Confirm and Send, the most we can
make on this trade is $875. And what are we risking? $875. So it’s now come to a one to
one split, you may have noticed. OK. And so if we want to put
this in with our calls– I don’t know if I
have this labeled as debit spreads in here. I’ll just put it in
our vertical bucket. And away we go. OK. So that’s one way
that someone might consider trading a W pattern. Now, if we come and
we look at CERN– so with CERN, we see
that just before I go in up close and personal,
we have this stock that has been uptrending,
and uptrending in a pretty significant way. It’s gone from $49 a share up
to $76.50 before the recent pullback, so since
the end of the year. And then when we
look at this, we can see that with this
pullback, this diagonal line, we saw a series of lower highs. But today, it’s breaking above
the diagonal resistance line. And what other pattern
are we seeing here? Pretty similar to a
pattern that we just saw. So if we come over here and
have a look, like I said, we’ve got this diagonal
breakout happening today. OK. Just let me make sure I’ve
got this going correctly. So if we look at this, we’ve
got this diagonal breakout happening today. Actually, this will
allow me to move a bit. And we also have this
W pattern happening, where today, it’s also
breaking above this midpoint in the line, which is another
thing that if we’re looking for this double bottom pattern
that we’re looking for, in addition, you can see
that we had a low here and then a similar low. Yet when we look at the
MACD, we have a low here and then a higher low. And so that might
indicate that sentiment, this divergence between
what’s on the chart and then what we have happening
here is another bullish sign, or at least that’s how some
technicians might look at this. Now, is that a guarantee? Absolutely not. But it is a sign for the
technicians in the group that things might be
moving to the upside. So what might we
choose to do here? Well, we could come back
to this and we could– let me just move back
over to the chart. So if we come out to the
Trade tab and we look at this, we could look at a call. So just let me write those down. So if we looked at a call on
this, what might a target be? So if we just come
back here, we can say, well, we had support here
around the $74 level. So if we had support down here
around the $74 level and that became resistance, it’s
currently at $72.50. Would there be enough premium in
it to do a short term or swing trade up to $74? If it goes past that, one
might expect it to maybe come back up to this $76 level. So when we look at
this and we say, well, would there be
enough premium in it if, say, by Friday this went to
74 if we bought an at the money strike? And so if we came
here to theo price, the first thing we
always hit is Reset. And if we said, if
this went up just $2– so now we’re at $74.10. Is this going to be enough
of a potential return? And then you don’t hit
Reset, you just hit Enter. So we’re going to come
back to the chart. And when we look
at this, what we see is if we’re paying the
mark on this is $1.54– so if we even pay the
ask at $1.60, if– oh, this is today’s date. Sorry. Let’s go to Friday. So let’s say, if by Friday,
because time will have an impact– so if by Friday this went
up, where would we be? And you’d be looking at
going from $1.60 to $2.58. And that’s if it went up to $74. Now, if it went up to $76, it
just depends on your time frame and it depends on volatility. Could it turn around and
head back south tomorrow? Absolutely. But this could be a
shorter term target. And one of the things
that some investors like to look at also– and if I just bring
this volume chart down, they can come up to Studies. And we’ll edit the study. And what they may want
to add is ATR, which stands for Average True Range. And why might we be
interested in that if we’re looking at
a short term trade? Well, what average true
range tells us, my friends, is the amount that
it is currently moving within the course
of a day as of today. And right now and for the
last week or so, this has been in the $1.30 to
$1.40 a share range. So we’re only looking
for a $2 move. So what the ATR is telling us
is that it’s entirely possible that in four days, if
the range is $1.40 a day, that that’s not out of
the realm of possibility. So if we wanted to tee
that up and then if we wanted to put an exit
in, where might that be? Well, if we look at the low
of today’s candle– and today is still a live candle. But if we say, OK, that candle
is at $70.92, that’s the low. So we could just choose
to go 1% below that and say, OK, at $70.92– and this is just as an example– $70.92 times 0.99. We could put our exit in
or our stop in at $70.21. So if it goes below
$70.21, it’s not going in the right direction. And our exit, our target, $74. So if we came in
here, we look at this. Now, sometimes people
will try and get a little closer to the midpoint. But if we just wanted
to go long, a single– so we’re buying a call. And actually, let me
go back because we can do this a couple of ways. But it’s easiest if we
say we want to buy custom and we want an OCO
bracket on that. So we’re going to make these
both good till canceled. We are going to
link this together. Because if we’re paying $1.60
to get in and if we come out and look at this and say, OK,
if we’re willing to risk $1,000 and we divide that
by 160 a contract, that would be six
contracts that we could do. And our target is– we’re going to
make this a market. And we’re also making
this a stop market. And this is conditional,
so we’re just going to make this
a market order also. So we want to get out
if it goes at or above, the stock, $74 a share. And we’re going to save that. And then we also want to
get out on the down side if it goes at or below– and our stock was $70.21. So when we come and we
look at these– so these are both market orders. So if we wanted to buy
six calls at $1.60, we’re going to sell if or when
CERN’s mark goes out or above $74 or if it goes
at or below $70.21. Our max loss, and this is if
it went to 0, would be $960. So you could either put that
in your swing trading bucket or you could put it
in a long call bucket if you tend to organize your
trades in that type of way. Now, we’re teeing this
up as an example trade, but there’s a comment
in the chat from Chuck which I think we should look at. And he’s saying the 30-day
moving average is not moving up, it’s rolling over. And so what we see with the
30-day moving average is– and if it’s a simple
moving average, not an exponential moving
average– so what it does is it takes the price
from the last 30 days. So what we’ve seen here
is that it has pulled back in the last 30 days. And it’s a little bit
of a lagging indicator. When the trend
starts to change, you need a few days of positives
to overcome that negative on the simple moving average. But that’s a really
great point to bring up. And what we saw here for
a period of time with CERN was that this 30-day
moving average was acting as a support level. And then what can happen? It can become a
resistance level. So if this comes
up, it could well, when we break out above
a resistance level, whether it’s a
diagonal resistance level or a horizontal
resistance level, it could end up coming
back and retesting. And so if that were
to happen, that’s not necessarily going to be a
surprise because this did act as resistance. So we’ve got to see CERN get
through that 30-day moving average also. And so some investors
or traders might say, I’m going to wait and
only take this trade if I see this go back above
the 30-day moving average. And so that’s
something that you may have chosen to add to your
notes as you’re placing some of these practice trades. OK. So how do we see these
trades setting up? One of the things
that you can do is just simply come
here to Public. And that’s actually what I
did to prepare for this class. So I came in and I
brought up the NASDAQ 100. And I linked them, as you guys
know, I’m sure, how to do so. You just come into this
paperclip and link your chart. And then you can very
quickly go through and start looking for these patterns. Of course, we’ve already
seen that on Apple. Now, if we come and
we look at Adobe– and let’s change our time
frame here to six months. So we’re looking a little
more up close and personal. So what pattern do you
see on the charts here in the shorter term? So we see this W pattern
setting up again, right? But has it broken
above the midpoint yet? No. And what else do we notice on
the charts that’s coming up? And I know you’re seeing
it in a pretty small font, but it’s important. We’ve got earnings coming up. So that can impact a trade, so
it can impact the volatility. Now it’s September 17. If we were to come out
and look at the monthlies, when is expiration? It’s the 20th. So if we were looking
at a monthly option on this, not that the
setup is complete anyway, but we also have to take
earnings into account and be aware of
when earnings are. If we come and we look
at AMD, so sliding down the list a little bit here. So we saw AMD trading in
this uptrending channel. It broke down, and then
what do we see again? So we’re on the other
side of earnings, but we see another W
pattern setting up here. But it’s not complete. So when we looked at CERN– so if we go back to CERN– and I just compressed some
of this stuff at the bottom. What we saw with this pattern
on CERN, as was pointed out– and we can just come back
over here to the bigger– if we come back over here
to the bigger screen, we’ve got this W pattern. And when we look at the
midpoint, CERN has broken out. And sometimes when we see all
of a sudden this resurgence or this turn around and
this buoyancy in the market, the tendency is to
look at a W pattern and say, well, if I buy now
or if I place my trade now, I may have more
of an opportunity if you wanted to go long. But maybe this particular
one here we’re strong on. But if we come back to– where were we? On Micron. And we– was it Micron? Oh, no. It was AMD. When we look at AMD,
it’s not even back into this upward trading range. OK. Can you see now? And thank you for
pointing that out. I think we’re OK now. I hope so. OK. So we’re still not here. But if we’re bullish– and then, of course,
we’re seeing on AMD that we have a red
candle setting up. Although actually–
and I have this set up this way so that
you all can see it. But myself, if I’m
at my desk, I like to see the candle in
relation to the trend. So what do I mean by that? Well, if we take a
good look at AMD, this candle is showing
red, which would indicate that it’s a down day. But it’s actually up on the day. It’s actually up
when we look at this. It’s up a percent and a half,
and yet, this candle is red. And why is that? Because it opened higher and
has dropped through the day, even though it gapped on
the open and is still up. So what some investors
like to do on the charts is they’ll come over
here to the sprocket, and then they’ll come
over to Appearance. And they’ll say, I don’t
want to just look at candle, I want to look at candle trend. And why do they want to do that? Well, the reason
they would do that is so that the candle will show
not only how it’s traded today, but it also will
show you how it’s trading in relation to the
candle of the day before. So the reason we have this
green candle showing up is because it’s still an up day. The reason I’ve switched
that for this room is because the full
color candles are easier for you to see on the charts. Does that make sense? But candle trend– personally,
that’s something that I like. So I just wanted to
share that with you. OK. So we were looking at AMD. So with AMD, we could look
at this and say, OK, well, we have a low and we certainly
have a higher low here. That’s supported on our MACD. If we come down here, we can
see we have a lower and then a higher, and it’s
moving to the upside. So some might look at a
short put vertical here. And some might
say, I’m just going to wait for this setup to be
complete because I would rather do a different type of trade. And so this is
where investors, you have this big tool kit full
of different types of trading strategies. And you have to decide which
trading strategy is going to help you achieve
your goals for one, and two, which
one is appropriate given the current trend in
the market, the current trend in the sector of the
stock you’re looking at, and the current trend
of the stock itself. And then you want to look at,
is volatility higher or lower? And then do you want
to pick a tool that’s maybe more buying offer
oriented or selling oriented? So there’s a lot of
different things to look at. So I wanted to bring
up our friend Netflix. And so here’s a stock where
we saw it get hit hard, it continued to fall, looks
like it’s coming back up. It’s back above this
10-day moving average. Has a ways to go to hit the 30. But we’ve got a bullish
divergence here. We’ve got earnings behind us. So if someone were
overall thinking long term that Netflix is still
a bullish strategy and they’re expecting
this to continue, they might look at a
short put vertical here. Another opportunity
might be Adobe– oops. And Adobe, this is, again,
one of those classics where if we’re having our
W day, we can see that, is this complete like CERN is? No. So if we’ve seen this
bounce start to happen and we’re still, as with the
other one, this candle is red, but we’re up on the day just by
a smidge, we might say, well, could we place a trade
below the bottom of this? Could we place a trade below? And somebody has
typed into the chat that they too were considering
short put verticals on AMD. So these setups provide us
with different ways of trading depending on where it is or
the opportunity to trade. Now, is it a guarantee? No, never. There are no guarantees
with technical analysis or with anything in trading. You never know what
surprises may come your way. So we know we’ve got
earnings coming up. When? September 17. So with this we
may go out and say, well, does Adobe trade
enough that if we wanted to do a short put vertical– and if we come back here,
is there a tight enough bid ask spread if we wanted to do
a short put vertical that it would be feasible? And so some investors have a
rule when it comes to trading and they’ll say, with
respect to volume and open interest, or
specifically open interest, they want at least 20 times
the number of contracts. So we can see here
on this weekly that it expires before earnings. We’re going to have
far fewer contracts than we are in the monthlies,
where we have hundreds. And at the $2.80,
we’ve got 1,600. Here, we have
dozens and hundreds. But if we look at
this and we say, OK, our bid ask spread is, by
some standards, within reasons. Within others,
they’re going to say, if it’s even on a $7 option,
if it’s more than $0.10, I want to look for something
that’s in the penny increment. That could be one of your rules. But if we look at this and say,
could we get enough premium if we went down at this
$2.80 or below level. So if we come out here we say,
OK, could we do the $2.80? What’s our delta on this? Our delta is 34,
which means we’ve got a 66% chance
that on September 13 this will expire worthless. Now, could that number
change tomorrow? Absolutely. But if we look at this
and we say, OK, we’d like to sell a vertical,
we’d get $0.74. Well, is that enough? Well, the quick and
easy way to avoid using the calculator, which
sometimes is my arch nemesis, we’re looking at
$74 in max profit, and our max loss potentially
here would be $1.76. So if we came back to our
calculator and say, well, is that enough of a return on
risk? $74 divided by $1.76. That’s about a 40%
return on risk. So if that meets your
parameters– some, their number might be 1% today
that they’re in the trade. And when we look at this
September 13, how long are we going to be in this trade? 25 days. So that gives us
more than enough if your rule is a percent a day. Some might say the
rule is 25%, some 30%. But this would
meet all of those. $72. OK. So if you’re willing
to risk $1,000, again, if we come here, $1.78. Let’s say we could
do five contracts. And then what some investors
will do is they’ll say, when I’ve got 80%, I’m
willing to shut this down. So they’ll come down
here to single order, say first triggers all,
right-click, Create Opposite Order. And say, you know what,
when this is worth $0.14, shut it down. That’s about 20%. Others will say, well, I want
to let it expire worthless. This is your trade,
but one typically should decide when
they’re getting out. Or one often will
decide when they’re getting out before they get in. They might decide to get out
if they see the trade break a support level. And they may decide to get out
if they see it hit a resistance level and start to tip. Maybe it’s at $0.25 and
they’re saying, hey, I’ve still got the
majority of it. Good enough. So we’re going to make
that good till canceled. We’ve got our five contracts. So again, the most we can
make on this trade is $360, the most we can lose, $8.90. Put that in our vertical bucket. Bob’s your uncle. So that one is teed up and
we’ll just see where it goes. So what I’d encourage
you to do is bring up a major index, like the NASDAQ,
like maybe S&P 100 or the Dow 30, and then just start
clicking through and saying, do I see more of these
W patterns setting up? And are they tradable? And in what way? And you could look at
something like a Lulu or– and as we do this, you’ll see
more and more of these patterns and they’ll become
easier to recognize. And then go through
the math of, is it closer to a support level? And ISRG, it still looks
like it’s pulling back. Is the pullback complete? So maybe this is just on
your short list to watch. And the reason that I’m
bringing some of these up is because the setup
isn’t quite complete yet. It’s not that I haven’t
looked at these. And then, what strategy might
be most appropriate for someone in this position? And then, have we
considered when earnings is? And is that going
to impact our trade? So, guys, our 45 minutes,
it has come, it has gone. It goes oh so quickly. I really appreciate
you joining me today. I had mentioned that
I would tell you the other classes you might want
to tap into if you’re newer– Technical Analysis, 11
o’clock Eastern on Mondays. That’s Cameron May. If you’re newer to trading
options altogether, you may want to check out the
Intro to Trading Options, which is on Fridays at 11 o’clock. If you’re approaching
ninja status but not quite there yet with
respect to technical analysis– and you probably
already know this– you may want to check out Pat
Mullaly’s class on Fridays at 2 o’clock Eastern. And that class is one of the
most watched webcasts each and every week. So I thank you for
being with me today. Just as a reminder, what
did we look at today? We looked at several
different stocks. We looked at a debit spread
or a long call vertical. We looked at a
short put vertical. And we also looked at a
long call or buying a call. And so we looked at
different trading strategies based on different setups. But know that in
order to demonstrate the functionality of the
platform in these concepts, we do use actual symbols. However, that’s
not to be construed as a trade or a recommendation. For any security or strategy
for an individual trader in their live
account, any decision you make with respect
to your live account is solely your responsibility. Also know that the
paperMoney platform, it’s a great way to practice. I encourage you to place at
least two or three trades using the kind of techniques
that we did today. But know that the paperMoney
platform and successful trading at a one-time period
isn’t a guarantee when it comes to a future time frames. So, guys, thank you so much. Best of success
with your trading. And I will look
forward to seeing you in a webcast coming up soon. Take care, my friends. Bye for now. And, yes, this will be
archived, so you can certainly catch the archives on any of
the classes I’ve recommended and this class as well. So thanks for asking that,
Good Living, and thank you all for typing into the chat. Bye for now. [MUSIC PLAYING]

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