Hey there, VWAPians!

If you missed Tuesday’s LIVE trading session at 9:30 a.m. ET, you missed a doozie.

However, as usual, The Warlock is here to save your entire trading career with yet another email chock-full of VWAP trading lessons, not to mention a FOLLOW-UP HIGHLIGHT REEL you can find right here!

Click here to watch Tuesday’s follow-up video!

The day started amidst a cloud of earnings buzz – after all, it’s only the BIGGEST WEEK OF THE EARNINGS SEASON.

Among the names making noise early Tuesday was package delivery concern UPS (UPS), which presented a lesson on one of my favorite VWAP Knowledge Bombs

Of course, Tesla (TSLA) also made waves. Despite making more than $1 billion in the second quarter (about 10x more than a year ago), the shares dropped out of the gate – presenting another lesson on a cheaper way to short expensive stocks

And, finally, the TSLA earnings headwinds put pressure on the tech-heavy Nasdaq-100 Index (NDX), which in turn weighed on the Invesco QQQ Trust (QQQ).

Now, Monday we talked about my favorite QQQ pattern to trade – the upside 1-minute VWAP break, which has been extremely consistent for me…

But yesterday, you witnessed something that happens once in a blue moon: The stars aligned for another QQQ short play – and I’ll tell you why right now.

And then don’t forget to join me at 8:30 a.m. ET on Money Morning LIVE, followed by our 9:30 hour of LIVE trading, where we’ll discuss Apple (AAPL) and all the other earnings on my radar today!

Knowledge Bomb of the Day

Today’s Knowledge Bomb of the Day is brought to you by UPS and viewers like you: The bigger the base, the bigger the break!

UPS stock sank out of the gate Tuesday morning, as quarterly domestic revenue missed analysts’ mark.

However, like I always say, “Stocks that report earnings and gap down usually find buyers.”

So I knew I wanted to stalk UPS shares at the open, and wait for it to revert back to its 1-minute VWAP – because remember, this level is almost like a magnet for stocks. They can’t stay away from the VWAP for long, so it was just a matter of time.

And speaking of time – that’s the entire basis for today’s Knowledge Bomb.

Let me explain.

UPS shares tried to bounce heading into the 9:30 a.m. ET opening bell, but were ultimately rejected – a “Kiss-Back,” if you will.

UPS 1-minute chart (pre-market activity shaded) – courtesy of Thinkorswim (ToS)

The stock then plummeted further, breaking its pre-market lows around $193, and then consolidated atop the $190.50 region for a while.

Now, some day traders might have become impatient here and just moved on – but not your boy!

That’s because I’ve found a few things to be true:

In other words, the longer a stock consolidates beneath the VWAP, the bigger the upside break tends to be, when it finally DOES definitively overtake the 1-minute VWAP.

So, I looked for UPS stock to finally come out of its channel, and then I was looking to strike.

And as per usual, everything I say is important, because look what finally happened after we wrapped our LIVE trading hour at 10:30 a.m. ET:

UPS 1-minute VWAP chart – courtesy of Thinkorswim (ToS)

UPS ended well off its session lows and back above the VWAP.

This goes to show that BORING ISN’T A REASON TO SELL.

This also demonstrates that while I have a custom multiday VWAP setup on my ToS charts, there’s money to be made in playing only the 1-minute VWAP line.

But what about stocks I expected to go LOWER yesterday morning?

Shorting TSLA and the Qs

One of the first things I said on air Tuesday was that I was watching TSLA for a short position after earnings.

However, short selling can be scary in and of itself, if you don’t know what you’re doing – not to mention there’s a lot of risk involved, which can be intimidating for traders who’ve only bought stocks.

And when you’re talking about shorting one of these high-dollar stocks like TSLA, which is trading in the $600s, that fear is only exacerbated.

But as I’ve said in this space before – there’s an alternate way to bet bearishly on a stock, and it comes with DEFINED risk from the get-go: Buying put options.

Because each option controls 100 shares of the underlying at a fraction of the price, buyers are able to get MAJOR leverage – and risk is capped at the initial premium paid for the options (as opposed to straight short selling, where losses add up the higher the stock goes).

Just remember my Day Trader’s Rules of Buying Options Around Earnings, which include:

  • Not buying until after the report is out, so I don’t pay for inflated implied volatility (IV) or have to guess at direction
  • Going at the money (ATM) or slightly in the money (ITM)
  • Using the options series expiring soonest (usually weekly contracts), so as not to pay for time value I don’t need

For instance, with TSLA trading around $632 at the time of the screenshot below, the $632.50-strike puts expiring this Friday, July 30, would’ve cost $15.22 – or $1,522 (x 100 shares). Compare that to about $63,200 to control 100 shares of TSLA outright.

TSLA options chain – courtesy of ToS

The goal for my put purchases is for the shares to drop below (or further below) the strike price that same day, in which case the added intrinsic value of the option results in a quick profit. I can then sell to close the option for a gain, and go about the rest of my day.

If the shares move against me while I own the puts, I’ll either sell to close them for a loss that same day, or if it’s late in the week and time value has been all but eliminated, I might let them expire worthless at Friday’s close.

Either way, I don’t stay in short positions long, and I don’t really like holding anything – including options – overnight.

Click here to watch how I plotted levels on the TSLA chart

That said, the final takeaway I want to leave you with RE: bearish positions is this:

Yes, you’ve heard me say, “Never short the Qs!

And usually that’s the case, because even on a day-to-day basis, the QQQ is usually on the upswing. That’s why upside VWAP breaks have been a relatively consistent bullish bet for me.

But on days like Tuesday, when a major Nasdaq component like TSLA is getting slammed and dragging down the markets, it can be a different game altogether.

However, an earnings dip alone isn’t enough to convince me to short the Qs – I also like to see the UVXY moving higher, because that tends to be a warning sign for the stock market.

As I’ve said before, the UVXY was literally designed to go lower over time, so when I see charts like this, my bearish ears perk up:

1-minute chart of UVXY – courtesy of ToS

And THAT, ladies and gents, is a clue that it could be a rough patch for the Qs that day.

Of course, as early as today, I may be looking to play another QQQ break above the 1-minute VWAP, but considering we have more mega-cap tech stars in the earnings circle – including Apple and Microsoft (MSFT) – the ETF’s trajectory will once again likely be determined by earnings.

The only way to find out how I’ll be trading the day is to tune into Money Morning LIVE at 8:30 a.m. ET right here, and stick around for my LIVE trading hour at 9:30 a.m.!

See you in the room!

Kenny “The Warlock” Glick


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