In last week’s letter, I said it was likely that we would see choppy price action before any further upside. This was based on the historical “wrong-way option traders” increasing their bullish bets to an extreme level. We certainly saw the chop — and a little bit of a correction.
The Dow was down just over 2% and the Transports were down almost 3%. While they are still within their respective trading ranges, the drop of almost 3 ½% in the Semiconductor ETF symbol SMH may be in the process of creating a Double Top.
The ongoing rhetoric of trade wars between the US and China has market participants on edge. Until there’s some resolution to that, it’s likely that we are going to continue to see corrective, choppy price action.
It was somewhat surprising to see that the best performing S&P sectors were Real Estate (XLRE) and Utilities (XLU). Both are interest rate sensitive and move inversely with interest rates. Also, surprising was the extent of the move higher in each relative to a small move lower in interest rates.
As interest rates move lower in Treasury yields, yields in real estate REITs and utility stocks become more attractive. Interest rates also decline when there is a perception of a slowing economy; however, those interest rates have risen considerably since the Presidential election.
The recent corrective action in the broader markets, stocks and interest rates all seem linked to the trade war concerns. The correction last week was minuscule measured by the S&P 500 ETF symbol SPY and the NASDAQ 100 ETF symbol QQQ down .86% and .94% respectively. But,…
The China 25 Index fund ETF symbol FXI was down over 5 ½% and the Germany index fund was also down over 5 ½%. The president’s threat of 20% tariffs on European autos was taken seriously. Clearly, this trade war talk is having a more damaging effect abroad — so far.
And it wasn’t just those two country funds. Malaysia, Singapore, Hong Kong, France, Italy are all falling sharply (I will review this in the ETF letter). For those that thought the South Korea fund would be good by based on the end of that war and the President’s trip to meet with North Korea’s president, wrong.
The trade war game of chicken to see who’s going to blink and negotiate first could result in a deeper correction here as well. And until we see the wrong-way options traders start betting on that aggressively (they are neutral now), we just may see that deeper correction.
Stay tuned, more gyrations are sure to come this week.
Dow Jones Industrial Average
Above is the chart of the Dow Jones Industrial Average that we review each week. The Dow started last Monday moving down to the support level marked in last Monday’s letter (blue area) and formed another Bottoming Tail by the day’s end.
It was the obvious place where buyers would attempt to take control after the several days of pulling back from the Major Resistance (MR) area above.
The trade war news that followed after the end of the trading day was a bit of a shock, as prices gaped lower and stayed lower all most of the day.
The Bottoming Tail (BT) that formed that day had virtually no follow-through other than a move above it Wednesday morning that failed completely.
The Major Support (MS) was the obvious next reference point where buyers were going to give it another try, and they did. So far, that attempt to hold this area is less than convincing.
The depth of the retracement from Major Resistance all the way back down to Major Support is bearish. But unless prices trade below the prior swing low, the trend in this time frame is still up, yet barely.
The fact that the 200-day moving average (red line) is directly below current prices (the price area at 24,200 to 24,400) is going to be a widely followed reference point this week.
I have coined this current market environment Mr. Schizophrenic multiple times this year. And other than short periods of prices moving with certainty, the erratic price action continues more than it doesn’t.
So it wouldn’t be so surprising (maybe it would be) to see prices move back up toward the prior high. But the fact that prices in the Dow moved under the breakout bar from three weeks ago, and closed under this week, makes it unlikely.
Anyway, before even considering that, let’s start with the consideration that buyers are beginning to take control if the Dow can move above Friday’s high and stay there by the close of trading on Monday.
If you did not get a chance to review the coaching session from last week, you can access it the same way you access the letters since it’s listed there.
I’m sure you’ll find it helpful to see the process of reviewing the broader markets, sectors, and stocks systematically.
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Market Overview Video
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NEW STOCK TRADING IDEAS
Below is a daily chart of Bristol-Myers Squibb Company (BMY).
Trade: Over $55.34, consider buying stock.
Technical Setup: Breakout following multi-week consolidation and Breakdown Failure (see the BT) daily, sector improving, monthly Major Support.
Stop Loss: $52.98.
Below is a daily chart of Ross Stores, Inc. (ROST).
Trade: Over $87.00, consider buying stock.
Technical Setup: Bullish +123 Continuation to new highs and Bottoming Tail daily, Breakout to all-time highs with bullish weekly and monthly.
Stop Loss: $84.78.
NEW OPTION TRADING IDEAS
Below is a weekly chart of SPDRÂ S&P Oil & Gas Explor & Prodtn ETF (XOP).
Trade: Over $43.10, consider shorting Jul (7/20) $40/36 bull put credit spread (26 DTE) for mid-point but a limit of $.35/share (closed at $.39/share).
Technical Setup: Bullish Gap Breakout from multi-week consolidation above 20/50-MA on the daily, bullish engulfing on the weekly, and price void above on the monthly.
Option Strategy: Bull Put Credit Spread (BPCS).
Stop Loss: $40.28.
Below is a weekly chart of Micron Technology, Inc. (MU).
Trade: Provided it opens below $58.00, consider shorting Jul (7/20) $62/68 bear call credit spread (27 DTE) for mid-point but a limit of $.75/share (closed at $.78/share).
Technical Setup: Breakdown from Major Resistance daily and weekly after Breakout Failure.
Option Strategy: Bear Call Credit Spread (BCCS).
Stop Loss: $61.91.
Below is a daily chart of CarMax, Inc. (KMX).
Trade: Over $81.67, consider buying stock and shorting Jul (7/20) $84 calls (27 DTE) for mid-point (calls closed at $.75/share so will be bigger when triggers and the premium will lower our cost basis and give us positive time decay income).
Technical Setup: Pro Gap and Breakout on +Vol. to all-time highs all time frames.
Option Strategy: Covered Call (CC).
Stop Loss: $76.19.
Below is a daily chart of Wal-Mart Stores, Inc. (WMT).
Trade: Over $84.85, consider buying stock and shorting Jul (7/20) $87 calls (27 DTE) for mid-point (calls closed at $.62/share so the premium will lower our cost basis and give us positive time decay income).
Technical Setup: Bottoming on daily and weekly, Master Trader Buy Setup on Minor Support and r20-MA monthly, relative strength to Dow-30.
Option Strategy: Covered Call (CC).
Stop Loss: $82.36.
VIDEO REVIEW OF OPEN TRADES
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