Weekly Plan 10.20.24
Traders-
The previous week presented another good week for the bulls, although the level of volatility experienced a significant decrease, resulting in a remarkably narrow trading range. Despite this chop, the market remained perched above the prior week's highs and maintained our position above them.
The primary expectation outlined in the previous weekly plan was for the market to find support above the 5838 level and target the 5922 level. Notably, these levels nearly represented the week's highest and lowest points. During the week, we encountered two opportunities to break above 5922 and below 5838, but both attempts were unsuccessful.
Understanding the market's ranges is a crucial first step in comprehending its underlying market structure. When the range is exceptionally narrow, it can be directly correlated with a lack of interest in the specific time frame. This frequently signifies a reduction in trading volume and can be thought of as lack of participation from larger institutional funds.
A lower-than-average volume generally implies fewer trading opportunities and increased choppiness in the markets. Market Makers can observe your orders and easily manipulate the market in low-volume conditions. Historically, trading sessions with volumes below approximately 1 million lots per day on the e-mini have not been particularly conducive to successful active trading.
However, when we observe volume exceeding 1.2 or even 1.5 Million lots during the day, the situation becomes more dynamic, and it becomes increasingly challenging for Market Makers to control the markets. Higher volume generally corresponds to a more extensive range, and when this range expansion occurs, it often serves as an indicator or consequence of increased implied volatility (IVs). In turn, this can signal greater uncertainty in the market. Such market conditions offer the most fertile ground for active traders. I tend to mentally shut-off during trading days with ranges of 30 to 40 points, as I personally prefer and favor larger range days, finding them easier to navigate and trade within.
The other positive side effect of higher volatility is if you mess up, and end up with a couple of bad trades, it is still possible to make up with higher range days. So if you are an active trader, you also probably like higher volatility.
The reason I bring this up is that we are currently seeing this stalling action here at these highs. And this could be a harbinger of a larger move ahead. This is not entirely unexpected, with the earnings season in full swing now, about 15 or so days left to the US elections, and then the year end, this in my view should be an explosive quarter.
There is this wait and watch stance to the market, primarily I think due to the elections. With the US elections, if you believe the traditional polling, the odds for either candidates remain a toss up. The race is supposedly very tight. If you believe the newer betting markets, then Trump is obviously the clear winner here. I tend to take both with a grain of salt- I do believe these betting markets are really very illiquid and easy to manipulate. Anyone who wants to influence the voters, can sway these betting markets with a few million dollars here and there.
I do not have very strong political views, but I do know that it is natural to underestimate the “other side” and put more weight on “our side”. So I will believe it when I see it, until then I personally think this race remains extremely tight and will come down a couple of states like Pennsylvania and Georgia. Now as far as potential result of these elections, believe it or not, once the elections are over, I think this should definitely help bring down the elevated VIX levels here. With a Harris win, you can expect a continuation of current low vol conditions, you will get more of last 4 years in the markets, which, minus the 2022 year, has been remarkably marked with low volatility conditions in the US stock markets.
With a Trump Presidency, do expect more ongoing volatility. Again, to my prior point, this could be a boon for active traders and a bane for more passive ones. With a Trump win, the main question you ask yourself is what is coming first? 60% tariffs on Chinese imports or rate and tax cuts? This will be a fertile ground for pretty much every day volatility and we can go back to 1-2% daily ranges every day for next 4 years.
Levels for next week
So everyone's wondering if the market has peaked at 5900 and if there's a big dip coming.
From where I'm standing, the market looks really overpriced right now. Like, not just a little bit, but a whole lot. So I get why some people are itching to short it at 5900.
But here's the thing. Technically speaking, I'm not convinced it's time to go bearish yet. My levels usually give me a pretty good idea of when the market's gonna react, and right now, it's not giving me that signal.
I mean, we can't even test 5838, let alone break it. And we're not even offering a couple of points below that 5850. So it makes me wonder, are the bulls really that desperate? Or are there even any bears out there?
So for now, I'm holding off on being bearish. But that could all change next week if we get a close or two below those key levels. Then, I think we can expect some selling pressure. But until then, I'm not getting my hopes up.
As for key levels to watch, I think we can lean on 5867-5868 this week. On the upside, 5900 is still important. We're currently at 5905.
Here are a couple of scenarios to keep an eye on:
Scenario 1: If we stay above 5896-5900, I think we'll continue to test the 5950s.
Scenario 2: If we sell off below 5900 but can't take out 5867, we could see more range-bound action between 5868 and the recent high of 5922.
But the wild card for me is a daily close below 5867. If that happens, I think we'll at least try to test 5838. And if we do, that could open the door to more volatility and a possible trade down to 5782 this week.
SO, that's my take on the market structure at this moment. Stay tuned, and let's see how it all plays out. If you are a regular reader of this blog, you know I don’t like to predict what’s gonna play out next, I rather prefer to see the market come to my level and react.
On a side note, I do wanna reiterate and share my view on intraday risk management. In my experience, for a 1% range day, which is roughly 40-50 dollars, 3-6 dollars is the MAX risk a lot of these traders are taking. Now it is a different story when the range is a 100 dollars. But like how many days you see a 100 dollar range day? If you go backtest this market, 70-80% of the days are going to be less than 50 points on the day.
In fact, most of the day’s ranges will be smaller than that. This is an extremely important piece of data- if you are routinely gunning for 70-80 dollars on the session, the long term data doesn’t support that. The Market Makers have very sophisticated tools that can predict most day’s ranges- they will price the options accordingly. Yes, they don’t always get it right but on balance, they are going to be right, they sell options for a living. Gamblers buy options for gambling. Who has an upper hand? The gambler or the professional? Leaving with some food for thought here.
Toyota
If you have been a consistent long term reader, you will recollect that I held a bullish outlook on TM at 130 dollars in the previous year. Subsequently, this stock experienced an upsurge, reaching my projected target of 240 dollars. At that point, I predicted they would run into quality control issues resulting of integrating new power trains into their vehicles.
Coincidentally, the 240-dollar level materialized as the stock's peak, and we have since experienced a 33% decline to the 160-dollar region.
It is astonishing that this entire sequence of events unfolded over a period of 18 months.
As we approach the 150-dollar region, I ponder whether Toyota sell off has reached its endpoint or if it will become another turnaround story, akin to SAP. Once again, if you have followed me for an extended period, you would be familiar with SAP, a German stock that had peaked my bullishness at 100 dollars back in 2023. This stock has also doubled since then and shares a comparable thesis: mismanagement leads to a stock's decline, while re-engagement from the parent company revives it.
In the case of Toyota, it is imperative to understand their corporate culture. They possess a remarkable propensity for learning from their mistakes. Any individual on the factory floor who adheres to their proprietary manufacturing philosophy, known as the Toyota Production System or TPS, can halt production entirely if they detect defects or potential defects. In comparison to American assembly lines, where a halt is a rare occurrence, a Toyota production line can witness hundreds of halts per day, hence explaining superior quality.
Consequently, I am not overly concerned about these recalls. I believe they have been significantly impacted by them, have taken appropriate corrective measures, and anticipate that these issues have been or will soon be resolved. As TM approaches the 150-dollar region, I contend that it presents a compelling case for bullishness. The largest auto manufacturer with a PE of 6? Expanding margins here in the US. A 3% yield on top of that? Count me in.
Folks, I don’t know if some of you knew that you can listen to this blog using the Substack app as well. I know these newsletters can get lengthy, they have to be to explain my thesis in detail, and nowadays we are all losing our power to focus due to a flood of short form videos. Everyone is getting into short videos and as a result losing their power to hold a line of attention for longer than a few seconds. I am hesitant to make short form videos, but if I ever do, the existing subscribers will be grand fathered in to have access to those. For now, use the audible feature of Substack app to listen to the post, in case it gets too lengthy. Reading dull and boring finance content, by the way is a tremendous skill you can develop to sharpen your ability to focus on time and sales and tape for hours on end. Very underrated skill. Obviously when I spend countless hours on this newsletter, I want it to be seen and read by larger audience. No one likes to work in a vacuum. This is where your time as a reader, spent on reading this is extremely appreciated. I genuinely feel bad putting in so much effort in this and for folks who cannot afford to read this or have lost focus to read thru long and boring finance text. But on the upside, you get access to ideas like SMR that move 100% in a month! Attention pays.
TSLA
TSLA earnings move will be +/- 10% or more.
TSLA I think looks good going into the earnings. I personally favor any dips that get into 190-200 post earnings, being supported on the stock to target 230s.
Elon has ingratiated himself within the inner circles of Trump, if Trump wins, I do not wanna be caught short on TSLA, atleast for first few months of Presidency.
Historically, loyalty with Trump is iffy. You can argue his bromance with any one and everyone sours after the honeymoon period, this is due to a strong personality that he has. However, in short term, if Trump wins, this helps Elon. May be Elon can undo this trend- may be he can seduce Trump beyond the honeymoon period with his vast wealth and meme skills & flattery. Who knows, these are all speculations, but these are some things to consider, believe it or not, when we do DD on TSLA here in October 2024.
On short term options, my views are clear- these are weapons of mass speculation. I go into any short term option with one key expectation- that it is more likely to go to 0 rather than moon. And should be regarded as such. Talking of short term options, November 1 $237.5 call if had for less than 2 dollars may make sense.
Other than this, there is really not much going on right now folks. If you are a regular reader, you know all about my calls on SMR at 10, PLTR at 6, SMCI at $3, PRMW at 18, CVNA at 3, NVDA at 40 , TSLA at 100 ETC. I am no stranger to sharing good solid ideas when they are in accumulation phase- I just cannot share when there is not much to share. I will say atleast try and take a 1-2 year long term approach and if it does not help you, try something else. We can’t be chasing momentum in FOMO when there is really not much to do here, except wait. These are but a handful of examples, in reality there are probably one hundred or more, recent calls made in last 1-2 years alone.
Another example- look at NFLX. Does it look good at 750 now? It does, but it looked far better when I gave it at 600 only 3 months ago. Let the market come to you. Never chase it.
Value
As far as value goes, the question is with these tech stocks being so expensive, is there any value left at all in the market? And I think the answer is it exists but you have to sift thru a lot of hay to find the needle.
In value, I like stocks which have virtually no competition. Have strong margins and are diversified in their services and products. If you recall, I shared NSC a few months ago at 200 as a value play.