Options Trading Newsletter - Issue #185 - China Lemming...
China Lemming...
China Lemmings…
Have you heard of the “lemming cliff jump”? It all starts with one lead lemming, jumping off a cliff and followed on by a second and by the next few minutes, many lemmings rush over to follow suit jumping off the cliff. Perhaps the first lemming saw some food just below the cliff and jumped to grab it and the same for the first few, but after a while, the rest may be just following blind and instead jumping just on the ledge below the cliff they jumped down to their death.
Sometimes, we do act in the same way as lemmings in the investing. We hear the news that China is putting out an economic stimulus plan and will pump in billions of dollars into their stock market and the market skyrockets. The narrative changes for all the analyst and media that China is uninvestable to the super bull market is coming back for the China stock market with low PE valuations making it an attractive market (only months before they were criticising the market and its stocks being politically risky and uninvestable) .
Investor and funds start pounding on the Chinese stocks and prices starts to drive up. Possibly the first few investor lemmings will be making some stock gain from the initial surge but for the lemmings behind, it may not be sure gains for them and some may even fail miserably if they just jump in without making proper assessment of the stock they are getting into. Just minutes ago on open, Baidu went to like $5+ going to a high of $111, an hour later it is trading at $106. Imagine you are the lemming buying at the top. We can’t say that tomorrow Baidu won’t go higher but, if you are investing like a lemming, then I would advise you better to stay out, because you could just well be the last few lemming, just jumping without knowing what is really ahead of you.
Yes, we are positive about the Chinese market, but still, when prices goes up parabolic, it is not the time to jump in as risk may be high. Let the dust settle a bit and when the path is clearer ahead, you could just see where the bounty lies. If you want to be a lemming, just make sure you are not the last last one! Happy investing!
ES (5791)
ES had hardly moved for the whole week, just up 29 points, although creating new highs every other day. It seems to be consolidating moving sideways waiting for the next move. Market is continuing to be cautiously bullish as we do not see big upmoves for the past week, so bullish price action seems to we relatively weak.
If it does not breakout above the trendline, it will only take a single bad news on this week’s jobs report to give excuse for market makers to run it down back to 21 daily moving average. We still see the area 5641-5755 to be a good area for retracement.
ES momentum is weakening and ripe for a pullback soon. So watch your longs this week.
Trading range for the week is 5750 to 5850.
NQ (20221)
NQ has gone to the upper side of the green box and retraced. If it break above the green box, it could reach the last high level of 20983. If it break down, we could see it coming back to the 20,000 level support. As of now, the price action is forming higher high from last retracement in August 24, which is overall bullish.
Short term, NQ should be bound for a retracement as momentum is sloping down.
Trading range for the week is between 19900 to 20800.
HANG SENG INDEX (20632)
HSI pumped last week after the China government announced their 50 bps rate cut and stimulus plan for its economy and to revitalise its stock market. HSI went up 2372 points (13%) in a single week. We were bullish on HSI and we did say that when it goes up, it can be very fast and unexpected. However, the pullbacks can also be steep. The last 2 runup, November 2022, lasted 3 months and gave way back for most gains thereafter and January 2024, gave way back to around 50% after 4 months runup. So do keep an eye for tops and retracements for profit taking of your longs. For support, look at the 20,000 level as next level support.
Keep a watch on 22,200 level for the next level of resistance if it breaks above daily 200 MA.
OPTIONS TODAY - UPDATE IMBALANCE IRON CONDOR NVDA
NVDA has gone up by around $4+ since entry. The trade is still within the trade range of 100-132. There should be some resistance at 129 level which is good for the trade. It can bounce around for now as that is just what we want it to do for the theta decay in our iron condor.
OPTIONS TODAY - UPDATE ON NEUTRAL IRON CONDOR SPY
SPY has broken above our upper range and our short call of $570 is ITM. Last Friday, we saw it close with some slight weakness and today on open, it is also in the red. Let’s see if a retracement comes for our trade to get back into profitability. As we have exited the bullish leg, we are fully directional on the downside now without any opposing trade that will reduce the profit when SPY comes down.
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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf
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