Jan 22, 20227 min
Updated: Feb 8, 2022
Hi Wealth Builders!
We had another bloody week with the major indices dropping like a rock.
Here's SPY:
Here's QQQ:
Here's DIA:
What's Driving The Sell-Off?
Like what we've been discussing over the past several weeks, Wall Street has fears with rising interest rates and inflation, coupled with upcoming earnings reports. If companies do not deliver stellar numbers, there is a chance that the sell-off could continue. Keep your eyes peeled with this upcoming week!
Technical Analysis 📈📉
SPY:
SPY broke resistance this week with a solid red candlestick and shot down right through the $453 support level. If we continue to sell off even more, we could see it revisit around the $433 levels again.
QQQ:
QQQ is continuing its downward trend and may be heading towards the $342 levels. Again, remember that may tech stocks that don't pay a dividend tend to sell off quicker during a time of uncertainty.
DIA:
DIA also broke through the upward trending orange support line and may be heading towards around the $342 level.
SBUX:
SBUX is at a key support level at $96, which is a level that the stock has bounced off in the past. If we break through, the stock may want to fill in the tiny gap and head down towards $91.
NKE:
NKE broke the $147 level may be heading down towards around the $129 level.
MSFT:
MSFT broke through its upward trending support line and may be heading towards the $288 level.
AMD:
AMD is at a weird spot where it landed on the upward trending purple support line. However, if it breaks through, it could trend back down to the previous resistance of $112 or even the upward trending orange support line.
AAPL:
Lastly, after redrawing some lines, AAPL could be retesting the $154 or back down to the upward trending orange support line.
Trade of the Week:
Like last week, I currently do not recommend starting any new positions on any Wheels this week since there is too much uncertainty. However, if you already own previous Wheels, you can continue to lower your cost basis by selling 4-6 week OTM calls near your adjusted cost basis to collect more premium. For example, if you entered a stock at $100 per share and sold a covered call for $300, your new cost basis would be $100 - $3 = $97 per share. You could then consider selling your next call at the $97 or $98 strike price, rather than the $100 or $101 strike price. When you do this, you will collect more premium since the strike price is closer NTM and you can use the premiums to lower your cost basis even more. Just note that when you sell at a lower strike price, you have a slightly higher probability of getting your shares called away if the markets decide to rally back up again.
I also want to note that since earnings are coming up and there is a lot of fear in the markets, you may notice that IV is much higher than normal. This means that we can take advantage of the higher premiums as covered call sellers.
Since we all know that markets will ultimately retrace later, it is important that we stay patient and calm. Keep selling your calls and let theta decay away the options. You can also view this as collecting a small dividend each month with your sold calls. I also would recommend to let your automated deposits and collected premiums sit as cash for now. And yes, cash is a position too. You don't always have to have all your money invested in the markets, which is why I recommend having around 10% of your portfolio sitting as cash.
Again, if you are a Premium Member, you can consider pairing your Wheels with some bear call spreads, which is what we've been doing over the past several weeks.
Ask Steve 💭
Let's see what some of our members asked this week. Here are the top questions we received:
Gary
Q: If my covered call does not get called away because the stock has dropped below my buy in price, should I sell another covered call but keep the same strike price, but with a smaller premium?
A: With this given market, you can consider selling 1-3 strikes below your initial strike or near where your new cost basis. If you entered a covered call trade at $100 and received $3 per share worth of covered call premium, your new cost basis would be $97. You could then consider selling around the $97 or $98 strike price. If you don't feel comfortable with selling a lower strike price, you can sell at the initial $100 strike for less premium. You would most likely have to be more patient for the stock to retrace given that we are in a broad-base sell-off.
Erik
Q: So you don't buy stocks when they pull back and are on discount? It's best to buy at a high?
A: We typically like to purchase shares when we see a strong upward trend in the stock price. The first method is to add onto your position when your stock hits around 5-10% from your previous purchased price. If you purchased 10 shares of a stock at $100, you can wait until the stock price reaches $105 or $110 before purchasing anymore. In essence, you are purchasing into strength.
You could also average down by buying stocks during a pullback. However, we careful with this method as you may catch a "falling knife" and have your shares drop even more. I typically recommend purchasing shares when they break out of a downward channel and have around a 5-10% bounce from the lows. You can be even more conservative to see if there is retracement with higher highs and higher lows before adding any more shares.
Samantha
Q: Should I start selling covered calls right now?
A: We would wait until after earnings to see how Wall Street reacts to company reports. There is too much uncertainty at the moment to start a new covered call trade.
Microsoft Buys Activision Blizzard
This week, Microsoft agreed to buy Activision Blizzard in an all-cash deal valued at about $75 billion, which is the largest acquisition by far.
If the deal goes through, it would expand Microsoft's videogame operation by adding a popular game franchises, including Call of Duty, World of Warcraft and Candy Crush, to Microsoft's Xbox console business and its own games, like Minecraft and Doom. This would make Microsoft the world's third-largest gaming company by revenue, behind China's Tencent and Sony. It would also strengthen Microsoft's already-large moat by making their Game Pass subscription services more appealing with the addition of games. We also know that subscription services, such as Amazon Prime, Waste Management services, Netflix, and Microsoft 365 bring in millions to billions of dollars worth of revenue each year!
Submit Your Questions 🙋♂️🙋♀️
Have any other questions? Before asking me and my team, feel free to check out our Level 1 FAQ. This FAQ is located on the Dashboard. You might find what you're looking for. 😊
If you do have questions, make sure to ask them on our Dashboard, rather than asking us via email. We also encourage you to watch all of the core video content and some of the past archived videos, read past Membership Positions, and take all the quizzes before sending us your questions.
Join Our Discord 💬
Investing, trading, and building wealth was a lonely journey for me. This is why my team and I created a Discord group for you and the other members to shares ideas and support one another. You don't have to go through it alone as we're all here to help. 😉
Make sure to check it out on the bottom of your "Dashboard" and follow the instructions on how to sign up. Coming from a teacher's perspective, I believe it's important to engage in conversations with people who are also seeking to reach financial freedom.
Remember that we are a community of wealth builders at all different levels, so be positive, kind, and helpful to others, so we can help each other get to financial freedom much faster.
Why Do Markets Sell Off So Quickly?
As you already know, usually when there is uncertainty, markets will sell off. Why? Here are the three main reasons you ought to know as an educated investor:
Stop-Loss Orders: Many institutional algorithms have stop-loss orders placed. This means that if a stock falls below a certain price/key-level or by a certain percentage, algorithms will automatically sell off blocks of shares to protect their portfolios from anymore loss. Since institutions have billions of dollars, they can sell off shares in 100,000 block increments, which can drastically move the markets down.
Monkey-See, Monkey-Do: Many institutions are also programmed to see what other institutional algorithms are doing. If they see other computers selling off their shares, they will often follow suit. This becomes a race to see who can sell off their shares the fastest.
Margin Call: Many institutions use margin to trade, meaning that they borrow money to put into the markets. However, many of them may want to exit out of their positions if there is a downturn in the markets, thus preventing them from getting margin called. Getting margin called is a scary event since it can force margin traders to sell their shares for a loss if they hold onto their positions for too long and the markets persist to keep falling.
With these three major reasons, it creates a domino effect where shares keep getting sold off.
This is one of the reasons on why I often recommend to buy into strength when the markets are doing well, such as buying more shares when they rise 5-10% from your initial entry. This prevents many people from being overweight in a particular stock and to ride the stock wave up. Remember to let the trend be your friend.
Now, don't get me wrong. This doesn't mean that we can't buy stocks at a discount. My concern with buying stocks during a sell-off is that they will continue to sell off, thus causing us to catch a "falling knife." I typically like to wait to see the market sentiment turn positive, a breakout in a downward trend, and around a 5-10% bounce from the lows to signal to me that institutions are ready to put their money back into the markets.
I know that the markets feel like they will continue to sell-off forever. However, I assure you that they will retrace back up in the long-term as long as companies are continuously generating increasing revenue. It is your job right now to control your emotions and to stay calm and patient.
I've seen this movie before many times where the storm comes in. However, the ending is always the same with the sun rising into the bright sky.
You got this! 👌
-Steve and the Call to Leap Team
The following article is strictly the opinion of the author and is to not be considered financial/investment advice. Call to Leap LLC and the author of this article does not claim to be a registered financial advisor (RIA) or financial advisor. Please visit our terms of service and privacy policy before reading this article.