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Dear Fellow Trader:

My indicators are giving neutral to slightly bullish readings again this week and, as I have been predicting, we are seeing more sideways action in the major indices. Stocks stumbled a bit early in yesterday’s session after it was reported that President Donald Trump’s meeting with North Korean dictator Kim Jong-un had been canceled, but I don’t think that’s going to mean much for the market in the longer run, and stocks recovered shortly thereafter.

One of the reasons I think we’re seeing sideways action, despite the Federal Open Market Committee (FOMC) announcing that it is considering another rate-hike in June, is that the FOMC was actually quite dovish in its statement this week.

The committee indicated that it is willing to let inflation run ahead of its target, which Wall Street took as a sign that the central bank will slow its pace of rate increases. I’m not entirely convinced, however, and I still think it’s possible that we could see three more rate-hikes this year, but we’ll have to wait and see.

The S&P 500 Volatility Index (VIX) is now back below the 13 level, and that tells me that the market is not in any danger of a major decline. It attempted to get above its 200-day moving average over the past two days, but it did not hold there on either occasion, which is a bullish sign.

Additionally, the U.S. dollar index is now bumping up against resistance at the 94 level, which I identified last week as a potential pivot point. The dollar’s advance will likely stall at this point or even move lower, which may hurt the small-caps while benefitting the larger multi-national corporations.

On the bearish side, we are getting into the summer months, which are usually dull with light action and a slightly downward bias. The ratio of advancing issues to declining issues is also not as strong as I would like to see, as most of the outperformance is coming from the small-caps and the financials. I think if we’re going to see any kind of major move up in the next few months, it’s going to start with the financials.

In commodities, the oil market is still bullish in the short term. WTI crude oil could even go as high as $80 per barrel and Brent crude could get as high as $90 per barrel. Even at current levels, prices at the pump are starting to rise noticeably.

Even though I still believe inflation is lower than almost everyone thinks, increases in energy costs may have a negative effect on consumer spending this summer. Furthermore, higher oil prices will eventually start to be reflected in food prices as the cost of shipping goods increases, so this is one way that inflation could creep into the market.

As far as the risks go for stocks at this time, there is also still the danger of a potential trade war, as President Trump’s policies on trade could eventually lead down an undesirable path. And, even at current levels and with the strong earnings we’ve seen this year, the market is still overvalued.

These are the sort of things we’re going to be looking out for over the intermediate term and, until the market breaks out of its consolidation range in one way or the other, we are going to be taking a relatively balanced approach with our trades. If we are able to enter today’s three new calls and two new puts, our portfolio will be equally balanced between bullish and bearish trades.

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 Harsco Corporation (HSC) Jul 25 Calls (HSC180720C00025000) at $0.85 or lower. After entry, take profits if the stock price hits $25.90 or the option price hits $1.80. Exit if the stock price closes below $23.30.

Buy to open the QUALCOMM (QCOM) Jul 62.50 Calls (QCOM180720C00062500) at $0.95 or lower. After entry, take profits if the stock price hits $62.30 or the option price hits $2.20. Exit if the stock price closes below $57.70.

Buy to open the NIKE, Inc. (NKE) Jul 75 Calls (NKE180720C00075000) at $1.35 or lower. After entry, take profits if the stock price hits $75.80 or the option price hits $3.00. Exit if the stock price closes below $70.20.

Buy to open the Fluor Corporation (FLR) Jul 45 Puts (FLR180720P00045000) at $0.65 or lower. After entry, take profits if the stock price hits $45.20 or the option price hits $1.80. Exit if the stock price closes above $50.50.

Buy to open the Toll Brothers, Inc. (TOL) Jul 39 Puts (TOL180720P00039000) at $1.20 or lower. After entry, take profits if the stock price hits $37.20 or the option price hits $2.70. Exit if the stock price closes above $41.50. Note: This is a relatively thinly-traded option chain, so you may need to be patient to get established at my recommended entry. Avoid buying a large number of contracts at once; instead, enter your orders in smaller lots of five or 10 contracts.

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 position closes below the stock-based sell signal price, exit the 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 close at or below 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.

As always, we’ll let you know when there’s a profit-taking opportunity, and we’ll be back with a look at all of our positions on Wednesday. Have a great weekend.


signed: Ken Trester
Ken Trester and the Power Options Weekly Team

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