Dear Fellow Trader:
My indicators are giving sell signals for the second week in a row. After one of the strongest moves in years — the S&P 500 has gained more than 16% in the first four months of this year — the index is starting to stall out at its prior all-time high levels in the 2,940-2,950 range.
As a reminder, this is just what I predicted would happen. Back on April 12, I said “I am expecting the index to test its highs again in the coming weeks or months, but I don’t think it will be able to break through that level on the first try.”
The markets are all about supply and demand and, right now, there is a lot of overhead supply (resistance) at those levels. While market breadth, or the number of advancing stocks to declining stocks, continues to show strong bullish signs, we will probably see a longer period of consolidation or even a pullback before the market breaks decisively higher and begins another leg up.
Daily Chart of S&P 500 Index (SPX) — Chart Source: TradingView
Two areas of the market that I am looking at which could still advance, however, are energy and financials.
After hitting a high above the $66 per barrel level last week, WTI crude oil has pulled back this week by about 7%. As you can see in the chart below, it was able to hold above both its 50-day and 200-day moving averages during yesterday’s decline.
Moving averages can be long term or short term in nature, but traders typically look at 50-day and 200-day moving averages for clues about market direction. Right now, the 50-day is pointing higher, indicating that recent momentum has been bullish, while the 200-day is still sloping lower.
Daily Chart of WTI Crude Oil Futures — Chart Source: TradingView
If crude can continue to hold these levels and start another upswing, I think the energy stocks could see a nice bullish move. As I mentioned last Friday, energy stocks have lagged the move up in oil this year. Continued momentum in the underlying commodity could really get oil and energy stocks going again.
Financial stocks are also showing bullish price action and have plenty of room to run. After falling sharply in mid-March, the financials have recovered thanks to some strong earnings reports from the big banks. They are still well off of last year’s highs, however, and could see further gains if the broader market holds up.
Speaking of earnings, they have mostly been coming in better than expected. The fact that expectations were very low has certainly helped, but it appears that analysts were overly pessimistic about companies’ performances last quarter.
As for the Federal Reserve, it reiterated this week that it is going to hold steady and not raise interest rates further at this time. The Federal Open Market Committee (FOMC) wrapped up its latest meeting this past Wednesday and said that inflation is still below its target level of 2.00%.
Some were actually expecting a rate cut, which would have been a positive for the market, but the committee simply decided to keep rates unchanged instead.
The other theme dominating the headlines this week was all of the new initial public offerings (IPOs) coming to market. Beyond Meat, Inc. (BYND) — a plant-based “meat” manufacturer — surged over 160% in its market debut yesterday, and ride-sharing company Uber is expected to come to market next week, just to name a few.
This is sucking a lot of liquidity out of the market, but the real problem is a lot of these newly public companies are actually losing money. While this is not necessarily reminiscent of the tech bubble of the late 1990s and early 2000s, when a lot of unprofitable tech companies were coming public, it does say something about the excessive levels of risk that market participants are willing to take right now.
The biggest question right now outside of these other issues is whether or not a deal will get done with China. There was some chatter this week that a deal could get done in the next few weeks, but even if it does, I don’t think it will be a very attractive one for the United States.
A bad deal or no deal would be the worst-case scenario for the market, and even a decent deal could be a “sell the news” event where stocks drop regardless of the details. On this front, we’ll have to wait and see.
With this big unknown ahead of us, and because we are entering the month of May after such a huge run higher in the broad market, I want to remain defensive at this time. Therefore, I am recommending two new call options this morning and three new put options to balance out our portfolio.
Let’s take a look at them now…
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 Arch Capital Group Ltd. (ACGL) June 21st $35.00 Calls (ACGL190621C00035000) at $0.40 or lower. After entry, take profits if the stock price hits $35.20 or the option price hits $1.00. Exit if the stock price closes below $33.20.
Buy to open the EVERTEC, Inc. (EVTC) June 21st $30.00 Calls (EVTC190621C00030000) at $1.10 or lower. After entry, take profits if the stock price hits $31.80 or the option price hits $2.40. Exit if the stock price closes below $28.60.
Buy to open the Zogenix, Inc. (ZGNX) June 21st $34.00 Puts (ZGNX190621P00034000) at $1.35 or lower. After entry, take profits if the stock price hits $32.90 or the option price hits $3.40. Exit if the stock price closes above $40.90.
Buy to open the Aimmune Therapeutics, Inc. (AIMT) June 21st $17.50 Puts (AIMT190621P00017500) at $0.80 or lower. After entry, take profits if the stock price hits $16.60 or the option price hits $2.00. Exit if the stock price closes above $21.40.
Buy to open the GasLog Ltd. (GLOG) June 21st $15.00 Puts (GLOG190621P00015000) at $0.60 or lower. After entry, take profits if the stock price hits $14.20 or the option price hits $1.40. Exit if the stock price closes above $16.50.
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.
Action to Take on Current Positions
We have closed one position since Wednesday’s Weekly Review, and we are planning to close three of our current trades at the open this morning.
On Monday, shares of Expeditors International of Washington, Inc. (EXPD) closed below our sell signal price of $78.00. The stock dropped 3% on Wednesday after breaking down through short-term support around $78.30, so I recommend that you close any remaining positions in the EXPD July 19th $85 Calls today if you haven’t already done so.
The stock was able to hold its rising 50-day moving average, so we may come back to this name in the future for another bullish play. For now, however, we have closed this position and will reallocate the remaining capital to today’s new trades.
We also have three positions that have reached their maximum three-week holding limit today — the Avaya Holdings Corp. (AVYA) June 21st $20 Calls, the Advanced Micro Devices, Inc. (AMD) July 19th $32 Calls and the Cronos Group Inc. (CRON) June 21st $14 Puts.
All three trades have now gone three weeks without hitting our targets or sell signal prices, so we plan to exit these positions at the open this morning in order to free up some capital for our new recommendations with better prospects.
If we are able to enter all five of today’s new trades, our portfolio will be equally balanced, with five calls and five puts. With the market at a potential inflection point, I think this is the best weighting that will allow us to take advantage of whatever the market throws at us next.
Ken Trester and the Power Options Weekly Team
P.S. 101 Option Trading Secrets
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Ken Trester and the Power Options Weekly Team
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