Lessons From A Penny Pro

Chart Patterns and Market Dynamics for Options Trading

It seems like stocks are trying to find some level of support after President Trump hinted on Twitter that trade talks between the U.S. and China maybe dead.  I caught last night’s news as I was coming back home from my family’s Disney trip.

And while I didn’t trade too many penny stocks, I was able to sneak in some option trades in…

Now, you must be thinking, isn’t Jeff Williams the PennyPro, the man who returned 220%, 270% and 600% on three different small trading accounts:

(I teach people how to trade penny stocks. I use real money to show them how my strategies work, if you want to join my service, and get my real-time alerts, learn more here.)

While it’s true… I did achieve those returns by trading penny stocks and working around the pattern day trader ruleI am also open to other market opportunities…

And sometimes specific patterns and catalysts are worth trading…

Including one of the most widely traded ETFs in the world… the SPDR S&P 500 ETF (SPY)

(I’m not much of an options trader, but when the right circumstances hit, I’m ready to strike, nearly $20K in profits, all while being on vacation, if you think you can benefit from my alerts, click here to find out more)

So what exactly was I looking at, to give me enough conviction to play both sides of the SPY on different days (long and short)?

Believe it or not… the answer lies in a hardly mentioned chart pattern (along with some other factors like understanding key levels of support and resistance.) Furthermore, if you’d like to find out more, read on to learn more.

 

Trading Penny Stocks Teaches You A Lot About the Market…

 

In order to grow as traders, we’re always looking for different strategies and new plays. Now, for the most part, I focus on trading penny stocks. However, last week, I decided to dabble with some options in the SPDR S&P 500 ETF (SPY), which tracks the performance of the S&P 500 Index.

Listen, I don’t trade options very often… I prefer to trade stocks since they are a bit safer for small accounts.

If you don’t know, you have to worry about time with options. You see, options have expiration dates… when you’re long options, time will hurt your positions… it’s something known as time decay. With stocks, you don’t have to worry about time eating at your profit and loss (PnL). So the last thing you want to do is just start trading options (if you have a small account) without understanding the basics. If you need a refresher on options, check out Jeff Bishop’s 30 Days to Options Trading – it goes over everything you need to know to get started trading options.

Now, you might be wondering, “Jeff… if you don’t trade options often, what made you start trading them again last week?”

Well, it’s pretty simple actually.

I took what I learned from trading penny stocks and applied it to options.

You see, with penny stocks, when there’s a large move down, I would look to buy for a short-term bounce… after a large run up, I would look to lock in profits before others start taking profits or shorting the stock, causing a sell off.

We saw something similar with SPY last week.

That said, let’s walk through the SPY options trade.

 

Double Top and Resistance in SPY

 

I actually took three SPY trades last week. Initially, I bought put options (betting SPY would fall). The reason: the markets showed a double top on the daily chart, and there was resistance at $295.

 

Nothing new there, using chart patterns that I use to trade penny stocks. Had I been long a penny stock and saw this pattern, I would’ve taken profits. However, since I had no position in SPY, I figured the market would pull back at those levels… so I decided to buy put options.

Well, last week, the market sold off with the FOMC announcing it was remaining patient, and wouldn’t look to do anything with interest rates yet. Now, the market was expecting a potential rate cut this year… so once the cat was out of the bag, the markets had a quick down move on Wednesday (as you can see with the big red candle) – pulling back from the resistance area around $295.

 

 

On Thursday, the market continued that sell off for a bit… once SPY broke below the 20-day SMA, I took profits.

 

(I don’t always trade options… but when I do, I know how to time my entries and exits. If you want to learn my trading strategies and get real-time alert, click here).

Morning Star Pattern and 20-Day SMA Support

 

Now, SPY reached the 20-day simple moving average (SMA) – the blue trendline. That said, I figured this was a good spot to buy call options (betting SPY would rise over the short term) because the last few times SPY tested the 20-day SMA, it caught a bounce.

Not only that, there was jobs data being released, which I felt would be strong…

 

Well, the jobs data was strong, and there were rumors of a deal potentially coming into play.

Moving on.

For those who don’t know, this pattern is known as the morning star pattern.

 

 

Basically, it’s a three-day pattern. The first day you should see a big red candle, followed by a gap down and a doji pattern on day 2. On the third day, you’re looking for a gap up and go. So if you can recognize this pattern and time your entries… it opens up the door for more opportunities.

That said, the calls I bought worked out perfectly…

 

 

Now, after watching the market explode off of this jobs data, I felt there would be some profit taking… remember, we’re in a very short-sighted market now. In other words, traders are very hesitant about holding longs. That said, I sold my calls for a 40%+ gain, and bought puts into the weekend, looking for a pull back.

Here’s the chart I was looking at.

 

 

Well, SPY gapped down big this morning due to some U.S – China trade talks…

 

 

Those puts worked out perfectly…

 

I encourage clients to learn as much as they can about the markets and develop multiple strategies to make money in any market condition – bull, bear, and choppy markets. Remember, these are very basic option trades (I’m only buying puts and calls)… buy to open either calls or puts… and sell to close those positions. I combine my chart-reading skills and experience to time the markets.

Want some more PennyPro in your life? Follow me on Twitter @ThePennyPro.

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