19 Dec 2021 SPX Weekly

Accuracy: 1/2 (50%)

Last Week

Didn't expect so fast to see an inaccurate prediction, I guess I'm too aggressive and positive about the market.

So last week was a pretty exciting week. On Monday we immediately broke down the ATH support of 4710. It feels like the market is slowly selling off to wait for the FOMC announcement. The moment FOMC announced on Wednesday, the bull was so strong that it closed the 2 days down move right above 4710 making a new ATH close. As expected, there's no surprise from the FOMC hence the market rushed in fast. Then come Thursday, Friday, SPX did another fake breakout and sold off towards the 50 moving average dip. It seems like there's some delayed reaction to the initial bull, people start to realize omicron is still lingering with uncertainties. Not to forget it's also the witching Friday last week.

Looking at the candles above, SPX took a dip on 50 moving average and closed with a long wick. But it still closed lower than the recent lowest close which is on Tues.

Next Week

Next week is a short week, the market is closed on Friday.

Not many major events next week, so from this perspective. There shouldn't be much volatility. Seems like most of the activities already happened last week. I hope for a Santa Rally next week.

Technical wise, let's zoom out abit. SPX is still on a decent uptrend. The 4710~ ATH is a tough resistance to break, it has been tested at least 4 times.

The 50 moving average was one of the very common moving averages that SPX tested on. From the resistance and support I drew, it also seems like there's an ascending triangle forming.

Prediction

Ok so the idea of doing all these analysis and predicting what's gonna happen next week is something I want to design a trade for ultimately. So to make the prediction statistics more achievable, it will be based on whether the trade is positive or negative.

So from the chart I marked 4550 as my conservative support area. The vertical green line is basically the expiry date on 23 Dec. Keeping it conservative, I will just put it such that SPX will stay above 4550. Which allows us to setup a decent trade below.

Trade Setup

I've been exploring a powerful option combo to be used for this short term trade - Broken Wing Butterfly (BWB).

As the market is not open now, the credit we see might not be accurate.

For the above BWB trade, I will collect ~$2 credit ($200)

If SPX stays above 4575 and expires, I will keep the $200.

If SPX goes down to 4525 to 4575 range, I have a chance of getting up to $2500 profit at the 4550 mark which is the support area I concluded.

If SPX goes below 4525 within 4 days before expiry, then I will be losing money of up to $2250.

For this BWB, it will take up $2500 margin impact. So it's about 8% return on capital play for 1 week.

Trade Management

I will be putting a stop loss on my trade at 4x credit collected ($8). This is to prevent realising max loss of $2500. So at max I will be losing only $600 for the $200 credit, because I already collected $200 upfront. Losing $800 - $200 means in the end I only lose $600.

I'm also pretty new to managing a BWB, so let's try small and learn on the way.

If a BWB is too complex, a simple bull put spread at 4550/4540 is also considerable.

Statistics

To count this towards my SPX weekly accuracy, as long as I'm positive to the trade I will consider it as a win. I will probably be adding this trade on Monday after reevaluating the contract price again when the market is open. I'll probably also put in the P&L statistics summary too. Let's see how it goes. Subscribe to stay updated!