Somebody bought 10,000 calls on one particular stock yesterday and I passed on it.
Someone else bought roughly the same size in a different name and it went straight onto my radar.
Two nearly identical orders hit the tape, but one was worth tossing while the other looked like a winner.
What separated them was one thing I check before I look at anything else, and it takes about four seconds.
Most traders never check it, which is why they end up in the right setup on the wrong stock and can’t figure out what went wrong.
Start with the one I liked.
Medtronic reported earlier this week, popped on the number, and was trading around $91.
Then the flow showed up. Buyers took roughly 12,500 of the 95 calls and 12,500 of the 96 calls expiring a week from Friday. By the end of the day it was about 15,000 of the 95s and 13,000 of the 96s.
On its own, that tells me somebody is taking a shot.
Those contracts expire in a week and cost about 35 cents. People YOLO things after earnings all the time, and if that is all I had, I would keep scrolling.
But it is not all I had.
The layer underneath
Before I look at a single option print, I look at what the market itself is doing sector by sector.
Healthcare is on right now. That is a signal and not my opinion, and when it is on, the sector goes up more often than it goes down.
So now the same flow reads completely differently. Somebody is buying short-dated calls in a stock that just beat, inside a sector that is already working, in a market that has been rotating defensive for weeks.
Then I pull the chart and it broke above its 21-day moving average and has been sitting on it without dropping through, which means this is not the first pullback anybody has bought.
Four things pointing the same direction is a trade worth thinking about.
Now the one I passed on
Somebody could buy 10,000 calls in D.R. Horton this afternoon and I would not touch it.
Housing has been off for 42 trading days. The most recent peak in the homebuilders was June 25th, and the chart has been going one way since.
Same order flow, size, but a completely different answer, because the layer underneath says no.
You are not looking for one good reason, you are looking for several that agree, and the fastest way to find out you have none is to check the environment before you check the trade.
Where the layer comes from
Tim Colby built it and we call it the Macro Gauntlet.
Half the signals come out of macro, meaning volatility, rates, currencies, the things that move underneath equities. The other half come from internal ratios, one sector measured against another, the Nasdaq against the semiconductors, that sort of thing.
None of it is valuation and none of it is a screen. Tim describes it as a macro version of momentum, and the signals run 10 to 18 days, so nobody is day trading this.
The same thing tells you when to stop being defensive. Right now healthcare and staples are on while the Q’s, meaning the Nasdaq 100, are in a downtrend.
Over the last three months that positioning has been worth a ten point outperformance in equal weight versus the Nasdaq, and about three percentage points against the cap weighted S&P 500.
When the signal flips to consumer discretionary and technology, you rotate back.
I use it in Delta Strike and in Wiretap, and any trade I hold longer than a day or two, I check this first.
Tim built the thing and he is showing people how he uses it.
Your only option,
Mark Sebastian
P.S. The signal that matters most right now is not healthcare being on.
It is what happens when it goes off, because that is the moment you rotate out of equal weight and back into the cap weighted index. Most people miss it because they are watching the sector instead of the switch. Tim shows you how to be on the right side.