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Look For A Short Squeeze in This Retail Turnaround Candidate

"Death by Amazon" is sooooo 2016. 

Fears that all retailers would be devoured by this tech giant has been a theme for years. And much of it has come true.

Toys R' Us just filed for bankruptcy. Many retail stocks have been in mature bear markets for years.

Yet we're coming to a point in time where all the easy money has been made to the downside... and it's time to start looking for turnarounds in retail stocks.

Here's one to watch over the next few weeks.

Guess Who?

GES has traded from 35 to 10 bucks over the past few years. It's not been a good time for long term investors. Yet this year we saw capitulation followed by a hard reversal.

Here's the look on a daily chart:

The past two earnings events have been large gaps higher, signalling a change in the fundamental outlook of the company.

Over the past week, the stock rallied hard into 16.50, which is prior resistance. It's currently undergoing a consolidation phase. If sellers don't come in aggressively, then the stock will complete some kind of a bull flag pattern.

Here's where it gets interesting...

20% of the float is short.

That means 1 out of every 5 shares of stock is currently loaned out to speculators who think the stock will drop.

Now think about this if you were a short seller. The stock has already run to 10 bucks and just saw a massive gap higher after earnings. There may, in fact, be improving fundamentals.

Where are you going to stop out?

If I were short, I'd use 16.50 as a stop. And so would many others.

If we clear recent highs, there's a high probability of a short squeeze higher.

How To Trade It

GES doesn't have a very liquid options board, so I would look at swing trading stock. If you did want to limit your risk, I'd look at just buying the Nov 17 calls for .45 as a full risk trade, and selling half on a double.

You'd need to see a move to 17 for that call option to double, which isn't very far away.

 

Check Out This Move In Energy Stocks

Strip Clubs in North Dakota.

That could have been the easiest "indicator" telling us that the oil market was running hot.

Starting in 2010, new oil exploration and extraction tech started to come into play. Oil shale fields that, once dormant, were now a massive source of oil wealth through fracking.

With the Bakken oil fields coming online, there was a massive move into these small towns in North Dakota. Oil workers chasing six-figure salaries went north.

And so did the rest of the "support staff."

New apartments built...
Restaurants broke ground...
And strip clubs popped up all over the place.

In 2014, it all came crashing down.

Crude Oil traded from 110 per barrel all the way down to 50.

Turns out, having a massive increase in supply causes prices to go lower. Who knew.

Since then... oil stocks have undergone a multi-year bear market with underperformance, culminating in an outright collapse at the end of 2015.

Here's a chart of XLE, the SPDR Energy Sector ETF:

So far, that $50 level seems to be the bottom for this market.

Yet, for all of 2017, energy stocks have significantly underperformed the market.

After the breakout from its downtrend in August, sellers came and slammed the energy sector back to new lows.

And then the rubber band snapped back. 

This is the strongest rally that energy stocks have seen this entire year.

Here's a look at the 10 day IWO Turning Point Indicator:

Over the past 10 days, XLE has rallied over 6%. This is the strongest move all year, and to me it's signalling that buyers are willing to rotate back into this sector headed into the fourth quarter of this year.

How I'm Looking to Trade Energy Stocks

As it stands right now, I think XLE and some select energy stocks are due for a fade... but scaling in will definitely help as I'm probably early on this call.

If and when the pullback comes, start looking for some bull put spreads to collect some income. And if the energy market goes sideways for a while without sellers stepping in aggressively... then some calls 3-6 months out in time will provide some nice profits.

I've already sent trade alerts on a trade in XLE, with the potential to earn 20-30% returns in a short time, while keeping risk low. If you'd like to get my exact trade alerts, start your trial to IWO Premium today.

Large Cap Tech Is Ready For a Big Move

 

Click Here For Your Free Bollinger Band Trading Ebook

The Second Worst Statistic In Options Trading

It's dangerous.

It blows out accounts.

And you've gotta see the massive blindspot that option "gurus" are avoiding when they talk about this statistic.

Sure, it makes sense when you look at the fancy charts but once you put it into practice, you end up with one or two bad trades that ruin your month or potentially your year.

Let's break down this misleading statistic and what you can do it.

The Basic Idea Of Option Selling

Before I start... I'm a huge fan of being a net seller of options. You can earn a stable, consistent profits with income trading.

Yet I know that they can be pinless hand grenades if I'm not careful.

Here's how the bad statistics get started...

There's something called "persistent risk premium."

Basically, the options market tends to overprice risk. That's because there will always be more institutions looking to hedge their bets than there are people on the other side willing to take on that risk.

It's where we earn our profit as option sellers.

Now the way we measure risk in the options market is implied volatility. It's the expected standard deviation of the market.

And the way we see what actually happened in the market is historical volatility. It's the actual standard deviation of the market.

Here's a chart of the IV and HV of the S&P 500 options market:

If you'd like this custom study for thinkorswim, get my thinkorswim secrets here.

As you can see, the implied volatility (blue line) tends to be much higher than the historical volatility (pink line).

That means option selling will work right? Easy peasy?

How You Could Get Smoked By Blindly Shorting Options

Let's say you're a true believer in selling vol. That the premium in the options market is higher than the actual volatility in a stock or market.

Here's a question for you...

Is it possible for you to be right and still get blown out of a trade?

Allow me to show you an example.

Here's AAPL. The stock reported earnings and had a nice gap up. It then saw what we call PEAD, or post earnings annoucnement drift:

The stock rallied from 130 up to 145 over the course of a month.

Going back and looking at the options, the implied volatility after the earnings was just a bit above 17%.

And during the trading after the earnings event, the historical volatility never broke 12%.

Obviously, selling options was a good bet... right?

Not so fast.

The at-the-money straddle was pricing in about $5 worth of movement either to the upside or downside.

Over the course of about a month, the stock moved twice that. Shorting volatility would have been a huge loser.

That's right, even though the stock volatility stayed low... you would have been run over on many short volatility trades.

What gives? How can this even be possible?

It's because the option selling true believers forget to mention one thing...

The Missing Piece Of The Puzzle

Markets move in cycles. I've written about market cycle theory before, but here's the cliff notes...

You have 3 cycles:

Price, Momentum, and Options Premium.

The relationship is this:

Generally, when stocks are selling off, option premium goes higher. And when stocks rally, option premium goes lower.

So here's where the statistics screw up...

When you look at volatility readings they are de-trended. The direction of the stock or market is not taken into account at all.

In fact, there's two kinds of historical volatility you should keep an eye on:

  1. Trending Volatility
  2. Reverting Volatility

Take a look at this market rally as an example...

Let's extend it a little further into auction market theory.

When the price of an asset is accepted, it will oscillate around that accepted price until either buyers or sellers run out.

Once liquidity dries up, price will auction either higher or lower until a new accepted price is found.

The kind of price action we see will cycle between reverting and trending volatility.

Make sense?

It comes down to this-- comparing HV to IV ignores the most dangerous part of an income trade-- TRENDING volatility. 

You Have To Adapt

Over the past decade I've worked with investors and traders to get better at options.

Many times, people will come to me with the same kind of story...

  1. I found a new magic button called "option selling."
  2. When I press that button, money comes out.
  3. That magic button worked for about 3 months, then I lost all my profits on one bad trade.

That one bad trade?

It comes from trending volatility.

I'm not here to say option selling is a terrible idea.

I'm saying option selling with no risk management plan is a terrible idea.

In other words.

Income Trading is Not A "Set And Forget" Strategy.

This is not an easy-bake oven.

Most of the time, markets see more reversion than trend. So yeah, you'll see some nice, consistent profits come in.

Whether or not you're successful is how you manage your trades when trending volatility comes into play.

I don't care how you manage them... just have a plan in place. Roll, hedge, close.

My favorite kind of income trade is an iron condor.

And just like any other kind of iron condor, they can get in a lot of trouble if trending volatility shows up.

In your free Iron Condor Toolkit, you'll get a pdf case study showing exactly the kinds of adjustments to take if the market starts to move hard against your position.

Because most of the time this trade is a layup. Consistent, easy profits.

Whether you're profitable at the end of the year comes down to how you manage the tough times.

If you want to see how to earn a better trading income, get your Iron Condor Toolkit here.

Three Stock Breakout Candidates to Watch This Month

After a full month of consolidation, the markets are hitting all time highs:

This is a chart of the QQQ - the ETF for the Nasdaq 100 Index.

The market has seen a breakout above the near term trendline, and also put in a "3 white soldiers" candlestick pattern, indicating aggressive buying interest in the markets.

Simply put, the sellers had the chance to take control of the market, but there was no downside follow-through. That lack of follow-through tells us that the overall trend is still intact.

What I'm looking for headed into September are stocks that did not see large increases in volatility over the past month, but haven't yet broken out.

These trades I call "compression breakout" stocks.

Setup #1: ETFC

The stock filled its earnings gap around 39.50 and found aggressive buyers. The key level to watch is 41.30, the most recent pivot highs from the past two weeks. If the stock clears that, then the range highs will act as a magnet, and odds are we roll higher.

Setup #2: BIDU

After a massive move on earnings, the stock has gone sideways, with a few shakeouts here and there. Odds are this is the start of a new trend... here is what the weekly chart looks like:

It was a long term explosive move off a multi-year triangle pattern. I'm looking for ways to play this to the long side.

Setup #3: FSLR

Very similar to ETFC... sideways action, an earnings gap fill but the long term trend is still intact. A break and hold above 50 would confirm the trend change that happened just a few short months ago.

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