The fears from Friday have all been erased, at least for now. It was a good reminder that if you size your investment positions properly, you may be able to avoid a shakeout on days like those. Over-reacting to a headline can often result in traders and investors selling out more than they need to when mornings get rough.
The scary part right now is how folks react to 1% moves lower. A 1% move lower is a blip in the longer-term scope, or even the scope of the last five years. New traders on the long side have truly been coddled. I don't mean that in an offensive manner, but the market has rewarded steadfast longs and covered up trading mistakes of the ultra-bullish. Believe me when I say that 1% drops are not painful. If you find them to be, then you better make adjustments to your trading or portfolio now before you ever do experience a broader drop.
Earnings season is coming to a close, but here is a trading idea to watch for the remainder of the season and one to take into next quarter: straddle price zone trading. The pricing of straddles is something I pay close attention to, along with my trading consigliore "Bosco." Over the past several years, we have closely monitored the price action of stocks in the afterhours, pre-markets and regular trading sessions in terms of the pre-earnings straddle pricing. Since fewer folks trade in the post and pre market, I am only going to examine the regular session trading, but you should know that this can absolutely apply to pre and post market trading.
Before Friday's trading session began, we had heard from both Weibo (WB) and JD.com (JD). The first chart simply looks at the 15-minute chart of Weibo the day before earnings and the day after earnings. The straddle pricing is shown in the yellow. In other words, the options market was expecting a move to the edge of the yellow in one direction or another. And that's exactly what we did see, but that isn't everything. You can't just assume that will be the move. That isn't much help to anyone. Instead, our focus is on where the move is over the first 30 to 60 minutes of trading. If we don't see a 15-minute close outside of the straddle zone, the anticipation is that we will remain within that zone for the rest of the trading day. In fact, you can carry that zone into the next two to three days, looking to play a break if it occurs.
In the case of Weibo, the only trade I would have considered was going long from the bottom of the straddle zone if we also had an oversold reading on the relative strength index (RSI). It did occur around noon, and a small profit could have been had, but overall it was a pretty neutral trade. Even though Weibo did trade under the straddle zone pricing for a good bit of the day, it was never more than a few cents away. The support area held well very well.
A similar case can be seen with JD.com. The stock opened near the low on the day. Straddles had $27.70 on the downside, which was something seen in the premarket, but we opened above $28. An initial push lower with a grossly oversold RSI, and those levels were never seen again. The stock did make an afternoon push but never sniffed $32.30 on the upside, which was the resistance level of the straddle zone. This didn't create much in the way of intraday trading opportunities, unless you bought quickly after the open. These levels should actually play out very well over the next week, though. The longer JD.com trades between $29 and $31, the more important a break over $32.30 or under $27.70 will become.