Dear Fellow Trader:
My indicators have been flashing buy signals this week, an upgrade from last week’s bearish readings, but the positive readings are mostly due to what was extremely bearish sentiment on Wall Street.
However, while we got a short-term rally that took the S&P 500 higher by over 6% in just a few days, yesterday’s 2.5% loss for the index showed why these rallies are not to be trusted.
Daily Chart of S&P 500 Index — Chart Source: TradingView
Therefore, I would characterize the past week’s action as a snap-back move. As I’ve mentioned before, when everyone is on one side of the trade, the market will often swing back in the other direction, which is what we saw this week.
In order to get a more sustained rebound, I think we will need to see a successful retest of the lows that were set on Dec. 24-26. Of course, that would mean another trip down to the 2,350 level for the S&P. But if that bottom can hold, it’s possible we could see a much more extended rally.
However, that’s a big “if.” If recent support gives way like it did back up at the 2,640 level, then the market could be in store for a much deeper decline.
In order to prevent such a decline, I think a few things will need to happen.
First, the United States needs to come to some sort of agreement with China regarding the ongoing trade disputes. Apple (AAPL) CEO Tim Cook spooked the market yesterday when he announced that the company is expecting lower revenue due to a slowing Chinese economy.
The announcement sent AAPL shares down by 10%, and investors will now look at other companies that do a lot of business in China with additional scrutiny. Companies that lower their revenue guidance like AAPL did will surely come under pressure, and that will impact the market as a whole.
Second, the U.S. needs to work out a deal to fund and reopen the government. The government has been shut down for over a week now, which has introduced some additional uncertainty into the investing landscape. As you know, the market hates uncertainty, so any kind of deal would be positive for equities.
Lastly, the Federal Reserve should hold off on reducing its balance sheet and raising the federal funds rate further.
Fed Chairman Jerome Powell will be speaking alongside former Fed Chairs Ben Bernanke and Janet Yellen this morning in Atlanta, Georgia, and I hope that he will provide some clarity around his previous statement that the Fed’s balance sheet reduction plan is on “autopilot.”
The Fed is currently unloading $50 billion worth of assets per month, which is tightening liquidity and hurting the market. If that pace continues with the market already so fragile, even if the Fed pauses on its rate hikes for a while, I don’t think stocks will respond well.
We’ll have to wait to see what Powell says this morning, but as I’ve said before, the Fed does not have a great track record of managing the stock market or the economy.
With that in mind, I am recommending two new call options and three new put options today. However, you’ll see that one of the call options is on the ProShares UltraShort S&P 500 ETF (SDS).
SDS is a 2X-leveraged, inverse exchange-traded fund (ETF) for the S&P 500 index. In other words, for every 1% the S&P moves lower, SDS should move higher by 2%. So, this is essentially a bearish trade on the S&P using call options.
If we are able to enter all five of today’s new trades, our portfolio will be skewed to the bearish side. Considering all of the bearish factors and unknowns currently swirling out there in the market, I feel that the best opportunities are still on the downside.
This Week’s Trades
Every week, I scan thousands of potential option plays to develop your exclusive list of Power Options. These Power Options rely on a proprietary, scientific approach that removes the guesswork and allows my powerful software to identify the best option buys.
All of these short-term options are actionable for up to three days after they are recommended. You’ll need to watch the stock and option prices to ensure the trades are close to where they were when I made the recommendation. If after three days you still have not gotten the position filled, cancel the order and watch for my new recommendations, as the profit probabilities may no longer be valid.
Buy to open the Omega Healthcare Investors, Inc. (OHI) Mar 15th $36 Calls (OHI190315C00036000) at $0.70 or lower. After entry, take profits if the stock price hits $36.40 or the option price hits $1.50. Exit if the stock price closes below $33.70.
Buy to open the ProShares UltraShort S&P 500 ETF (SDS) Mar 15th $51 Calls (SDS190315C00051000) at $1.75 or lower. After entry, take profits if the stock price hits $49.60 or the option price hits $3.70. Exit if the stock price closes below $42.40.
Buy to open the Bausch Health Companies Inc. (BHC) Mar 15th $18 Puts (BHC190315P00018000) at $1.15 or lower. After entry, take profits if the stock price hits $17.30 or the option price hits $2.40. Exit if the stock price closes above $22.20.
Buy to open the AMC Entertainment Holdings, Inc. (AMC) Mar 15th $11.45 Puts (AMC190315P00011450) at $0.60 or lower. After entry, take profits if the stock price hits $11.30 or the option price hits $1.30. Exit if the stock price closes above $14.10.
Buy to open the MetLife, Inc. (MET) Mar 15th $37.50 Puts (MET190315P00037500) at $1.10 or lower. After entry, take profits if the stock price hits $37.20 or the option price hits $2.50. Exit if the stock price closes above $42.80.
Remember, if a profit target is hit intra-day, exit and take profits immediately. Occasionally, if a sudden profit appears, we may recommend exiting a position early to capture the gains, and my team will alert you during the trading day via email or text message if you have elected to receive them.
If the underlying shares violate the stock-based sell signal price at the close of trading, exit the option trade the next morning at the open.
Additionally, if an option or its underlying stock does not hit its target, or if the stock does not violate its sell signal price within three weeks of entry, close the position. I do not recommend holding an option play for more than three weeks.
Thanks for reading. Have a great weekend.
Ken Trester and the Power Options Weekly Team
Important Note: This sample issue was originally published several months ago. All of the trade recommendations are now out-of-date and no longer apply. When you're ready to get into the next trades simply click the button below.
Claim Your 15 FREE Trades