The Worm Has Turned… What’s next?

William Griffo

Hey There Income Hunters,

Well, the patience paid off …

And, boy, was it worth it … a recent put spread play produced a 60% profit — in just six days — for a 3,500% annualized return!

This is how the divergence between price and relative strength of price played out:

On Jan-08, SPY set a high of 380.59 and set a high RSI at 69.88
It then reversed and traded down to a low of 373.70
It held and reversed back up and set a new high of 375.25 … however, this time the RSI only increased to 67.53 and the market traded off a bit from there.

This divergence between price and relative strength of price revealed less strength on the rally to new highs …

I executed the 385/375 put spread and five days later the market broke down …

I booked my profits on SPY and have similar exposure elsewhere. Let’s check it out …

IWM = WIN

I also recently purchased the iShares Russell 2000 ETF (IWM) 113/103 put spread on and will let that run.

I would really like to take the IWM trade to Feb-19 expiry. Here’s why …

The chart below shows recent activity in IWM with the strike I purchased (213) and the strike I sold (203).

To maximize the trade, I would like IWM to close below 203 on Feb-19 …

In that case, I would sell IWM at 213 via the long put, since a put is a right to sell the stock, and also buy IWM at 203 via my short put, since a short is a right to purchase the stock …

I expect IWM to trade down to the 193-198 area on this move …

I think this is a mild correction since the Fed will most likely come in and support the market by doing more quantitative easing (QE).

I also think this move down could push the Biden administration to increase its stimulus package, which will be good for the market.

And I firmly believe we’ll see upwards of $5 trillion in stimulus spending in 2021.

Bring It Home

So, once the broad indices get oversold on the relative strength index (RSI), I will look for an opportunity to get long …

Volatility is going to stay high for a while and I will be teeing up plenty of other trades over the next week.

So stay tuned, and as always …

Live and Trade With Passion My Friends,

Griff

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