Dear Fellow Trader:
My indicators are now giving bullish readings, an upgrade from last week’s bearish readings, although they only turned higher mid-week. Basically, what we saw in the market this week was a snap-back rally on Monday that then morphed into a “Powell rally” on Wednesday that took the S&P 500 back above the 2,700 level.
Federal Reserve Chairman Jerome Powell spoke at The Economic Club of New York on Wednesday and said the following: “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy — that is, neither speeding up nor slowing down growth.”
The key phrase in that sentence is “[Interest rates] remain just below…the level that would be neutral for the economy.” Wall Street took that to mean that the Fed may not need to be as aggressive with the pace of interest rate hikes in 2019, and that sent the market sharply higher.
You can never really tell what the Fed is going to do next, so I remain skeptical that the central bank’s monetary policy will be as dovish as Powell implied. Even if the Fed did stop hiking rates, it would likely continue to offload its massive balance sheet next year, so we still need to be wary of this quantitative tightening situation.
Nonetheless, what we are seeing now is typical for this time of year. As I’ve mentioned before, the market almost always rallies into the end of the year, especially during a mid-term election year. And while I’m still a bit cautious, it looks like a “Santa Claus” rally — when stocks rally during the last week of December — could be in the cards.
From a technical perspective, the major indices have now successfully retested the lows from late October and have started to move higher, indicating that a “double bottom” pattern is forming.
Daily Chart of S&P 500 (SPX) — Chart Source: TradingView
As you can see in the chart above, however, the S&P is now approaching its major moving averages from the bottom. These levels could act as resistance, so we’ll need to keep a close eye on the action today and next week to see if they hold.
One big factor that could determine whether the market continues its upside move or gets sent back down is what happens with the meeting between U.S. President Donald Trump and Chinese President Xi Jinping at the G-20 summit on Saturday.
While we can only guess what will happen, I don’t think the meeting is going to result in any significant trade agreements. China is unlikely to back down or concede to U.S. demands — that’s just not the nature of their leadership or the way they typically operate.
I have a feeling that others on Wall Street may feel the same way, so I wouldn’t be surprised to see the market head lower today as traders take some risk off the table ahead of the weekend meeting. On the off-chance that the two leaders do announce some sort of deal, then we could be in store for a major rally next week. But right now, it’s still too early to tell.
That’s one reason why I’m recommending a mix of bullish and bearish trades again this week. The other reason is that the S&P 500 Volatility Index (VIX) is still relatively high compared to where it was trading from May through September of this year.
Daily Chart of S&P 500 Volatility Index (VIX) — Chart Source: TradingView
As you can see in the chart above, the VIX is back below the 20 level, but it’s hovering just above its 50-day and 200-day moving averages. The 50-day (red line) has already acted as support once this week, and if it holds again, we could see the VIX jump again.
Although it’s not indicating any signs of panic like it did back in February, I want to wait until the VIX really starts to move lower again before I jump completely back into the bullish camp.
Therefore, I have recommended three new call options and two new put options below. Let’s take a look…
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 Herbalife Nutrition Ltd. (HLF) Jan (2019) 60 Calls (HLF190118C00060000) at $0.95 or lower. After entry, take profits if the stock price hits $60.00 or the option price hits $2.10. Exit if the stock price closes below $55.50.
Buy to open the American Express Company (AXP) Jan (2019) 120 Calls (AXP190118C00120000) at $0.75 or lower. After entry, take profits if the stock price hits $117.30 or the option price hits $2.40. Exit if the stock price closes below $108.60.
Buy to open the CareTrust REIT, Inc. (CTRE) Jan (2019) 20 Calls (CTRE190118C00020000) at $0.55 or lower. After entry, take profits if the stock price hits $20.90 or the option price hits $1.20. Exit if the stock price closes below $19.40.
Buy to open the Proofpoint, Inc. (PFPT) Jan (2019) 80 Puts (PFPT190118P00080000) at $1.00 or lower. After entry, take profits if the stock price hits $85.40 or the option price hits $2.90. Exit if the stock price closes above $99.60.
Buy to open the Plains All American Pipeline, L.P. (PAA) Jan (2019) 22 Puts (PAA190118P00022000) at $0.65 or lower. After entry, take profits if the stock price hits $20.90 or the option price hits $1.70. Exit if the stock price closes above $24.10.
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, but we will not be closing any other trades this morning.
When we entered our trade in the Okta, Inc. (OKTA) Jan (2019) 40 Puts last Friday, shares were trading below their 200-day moving average and were looking bearish. However, the stock quickly jumped back above that level when the broad market rallied on Monday, and it continued higher throughout the week to close above our sell signal price of $55.80 on Wednesday afternoon.
We then cut our losses and exited the trade the following morning. That turned out to be the right move, as OKTA jumped another 5% during Thursday’s session, so we recommend that you exit any remaining positions in the OKTA puts today if you haven’t done so already.
Elsewhere in our portfolio, our positions in the United Continental Holdings, Inc. (UAL) Jan (2019) 100 Calls and the Vanda Pharmaceuticals Inc. (VNDA) Jan (2019) 26 Calls are showing healthy gains as of yesterday’s close.
Futures are forecasting a lower open this morning, but if the market starts to turn higher intraday, keep an eye on your inbox for a potential mid-day alert to take profits in either of these trades.
Thanks for reading. Have a great weekend.
Ken Trester and the Power Options Weekly Team
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.
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