Saturday, June 10, 2017

Ascending Triangle Breakout Trade on Citigroup & Current Market Outlook

On Thursday, the general market was moving sideways for the 4th day. But the financial stocks were the best performing sector mid-day. The financial ETF XLF broke above the 50 day moving average with high volume after living under it for over 2.5 months.

Citigroup C was a member of the ETF. I noticed it was a leader in the group a couple of weeks ago since it seemed to be in the process of forming an ascending triangle pattern while other financial stocks were trending lower and testing lower support levels. On Thursday, C broke out of the resistance level around $62.65 with high volume.

The pattern before the breakout lasted about 11 weeks. So I added a couple of weeks more for the expiration date and chose September 15, 2017 Call with a strike of $60 which had a Delta of 0.70. It was higher than my desired Delta of 0.62 but it was the next higher Delta that was above 0.62 for the September call options. I started with limit order at $4.78 and watched the price going higher. I kept raising my limit order little by little and eventual got filled with $4.85 within 10 minutes.

My mental stop loss point was set to $59.78, which was slightly below the swing low 7 days ago and the 50 day moving average. My target prices of the stock was $62.56*(1+10.6%, percentage of the rise in the pattern) = $69.19. The calculated Reward/Risk ratio was close to 2 for the stock trade. When the stock prices reach these points, I plan to take actions to sell the call option. As usually, I will leg into a diagonal from this naked long call when the stock shows the signal of pulling downwards.

Overall, I’m still mildly bullish for the general market, even with the huge sell-off in the NASDAQ today. The 2.5% plunge of QQQ today was much larger than that on May 17, about 3 week ago on the scare of presidential impeachment. Friday's tumble was accompanied by the largest volume since the starting of this round of uptrend in December, 2016. This is a serious concern for the market health.

However, the SPX and Russel 2000 indices were still doing OK on Friday. There were other sectors (XLE, XLF, etc) rising significantly. So it did not look like a broad market sell-off yet. The accumulative new highs – new lows indicators mentioned in my previous post did not drop yet. If there are more bearish signs on the market next week, I’ll take necessary actions.

My positions in different accounts are all bullish at the moment, although I kept my open positions relatively small for now. I also have short calls on my SPY & QQQ long calls as hedges as described in my previous posts. Now, I felt compensated on my action to follow my trading rule and to take some profits on June 2 when the markets broke above the upper line of the trading channel as I describe in my post: Closing Trades to Take Some Profits as Market Broke above Upper Boundaries.

Since the SPX had already rested and moved sideways from early March to early May for 2 months, I think it could continue to advance for another month which is July, unless market shows other signs of a major top.  I plan to have a vacation in July. So I need to keep the number of positions small for now from this perspective.

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