Market Milestones: LEAP DAY

[Image] Happy Friday , We have witnessed historic levels of exuberance in the markets since November 1st, 2023. Since the low on October 30th, the SPY has rocketed an astounding 24.5% higher to new all-time highs, making every investor who ever bought the S&P 500 profitable. In the January 27th Market Milestones, we asked the question as to whether the 2023 move was a leading diagonal or an ending diagonal. That question is still up in the air and there is plenty of time to plan for either scenario, but it seems that however you look at it, this market is ready for a retest. SPY [Image]( The RSI divergence on the SPY is getting exaggerated, meaning a breakout gap up with another extended move higher is not the highest probability outcome at this point. AAPL, which makes up 6.6% of the SPY and 8.1% of the QQQ, is resting precariously on a critical support. The trouble for AAPL started January 2nd with a nasty gap down after an all-time high trap. It has been struggling ever since. In an effort to drive excitement this week, Tim Cook dropped the two most magical letters of all for headlines to run with. AAPL’s foray into AI is certainly welcome news for everyone who has had to put up with Siri for the past 13 years. If AAPL gaps down over its support or closes strongly below, look for AAPL to push into $166.00. AAPL [Image]( GOOGL, which makes up 4.5% of the QQQ and 3.74% of the SPY, is also struggling to hold its own critical support at $136.00. It, like AAPL, saw an all-time high trap just before a very nasty gap down. It has since retested the gap down and moved lower. MSFT, which is 8.7% of the QQQ and 7.2% of the SPY, is another chart that could be setting up a topping pattern. The largest retest MSFT has had since November 1st has been 5.5%, so it could certainly use a pullback into the long-term moving averages. It is currently sitting in the middle of a bearish retest gap and a bullish retest gap that have both filled. The direction MSFT breaks will be important to watch for the markets. MSFT [Image]( [Image] Thursday of this week was leap day, a day that only rolls around every 4 years. I don’t think I am taking too much of a leap to discuss LEAPS in this edition of Market Milestones. Frankly, I leap at any chance I get to discuss Long-Term Equity Anticipation Securities. While they may sound complex, scary and hard to understand, they are simply a long-term options contract, i.e. calls or puts. Long term in this case means an option with one year or more before the expiration. Before you leap into action and start buying these things, let’s go through a few of the pros and cons of LEAPS and some basic rules to employ when trading them. Increased leverage is the main reason many traders use LEAPS. Buying one call option gives you the right, but not obligation, to buy 100 shares of a stock at the predetermined strike price. The LEAP will cost a fraction of what it would cost to buy 100 shares of the stock. This gives traders with small and large accounts, the ability to leverage their money. A trader could hypothetically get 10 LEAPS and control 1,000 shares for the cost of buying 100 shares of the stock. This is where the risk of LEAPS leaps onto the scene. If you buy 100 shares of a good company, say AMD, it is highly unlikely that it goes to zero. However, if you buy 10 LEAPS on AMD, there is a good possibility that those go to zero, especially if you are buying out of the money LEAPS. As with any option, the LEAPS needs to move in your direction and do so in a time efficient manner. LEAPS lose money every single day, which is known as theta decay. Your options have to go up enough to counteract that theta decay and keep you profitable. That means a sideways trend can crush a LEAPS trade. That’s why there are a few rules to consider if you want to take a leap of faith and start trading these. The first rule would be to always buy in line with the larger time frame trend. If you can’t easily define what direction the stock is going, it’s not a good candidate for LEAPS. The next would be to buy after a retest so that the premiums are not outrageous. The final rule would be to look for strong support if you are buying calls. Buying off of large moving averages such as the 100DSMA, 200DSMA and 100WSMA can be a great strategy in bull markets. How far in or out of the money to buy will come down to one’s individual preference and strategy. However, a good place to start would be a couple strikes out of the money. One recent, highly publicized LEAPS trade comes from the famous options trader Nancy Pelosi. You may know her as one of the many octogenarian politicians in America, but her trading acumen has become quite well know, especially on X. Some might say that she is benefiting from inside information and shouldn’t be allowed trade. Anyway, Pelosi loves deep in the money LEAPS and her recent trade on PANW is no different. She bought 70 call options with a strike price of $200 that expire on 1/17/2025. She bought 50 calls prior to earnings, apparently her inside info was a bit off this time, and 20 calls the day after the earnings gap. The first buy clearly broke rule two from above, which says to buy AFTER a pullback when purchasing LEAPS. The second buy is pretty much a perfect example of how and when to buy LEAPS. The trend on PANW is quite bullish to put it mildly. The day after earnings it was down 30% and hit the 200DSMA for the first time in over a year. The $261.00 level was a strong old resistance turned new support level that had not yet been retested. Just because the trade checked all of the boxes does not mean it will win. It just gives it a higher probability of winning. If you leapt ahead and are just reading this final paragraph, I suppose you could call that leaping to conclusions. PANW [Image]( Strive On, Yates Craig, RLT Market Analyst [support@RLTNewsletter.com](mailto:support@rltnewsletter.com) Disclaimer: Trading involves inherent liabilities and risks. By accessing this newsletter, you acknowledge and understand the associated risks with trading and investing. This newsletter or email does not serve as a solicitation to buy or sell any security, and its content should not be construed as financial advice. The trades, analyses, and results presented are for entertainment and educational purposes only. These materials do not substitute professional advice from a qualified individual, firm, or corporation. Past performance does not guarantee future results, and simulated performance results have inherent limitations. Readers are strongly urged to consult a qualified financial advisor or professional before making any trading or investment decisions. Each individual's financial situation is unique, requiring personalized advice. 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