The broader markets have been erratic this year as they consolidate the gains over the last several years, which accelerated in 2017. However, even the strongest sectors gave up some of the gains due to the trade war fears.
Now that those tariffs have become a reality, what did the markets do?
As the tariffs went into effect on Friday, buyers showed up in force in selected sectors and stocks. Even the country funds that had much larger corrections rallied back last week.
Our market internal gauges gave us a “heads up” that a pullback was at hand right at the top of the recent move and they again signaled that a low was at hand the week before last week’s low.
The wrong-way option traders that historically load up on call options (bullish bets) and put options (bearish bets) at the worst possible time didn’t let us down.
It would not be a surprise to see the Russell 2000 — which has been leading the way higher this year — make new all-time highs this week. The theme there has been that the stocks in that index are less susceptible to the effects of a trade war.
The relative weakness in the Dow Transports and Industrials is a clear message that if you’re not in the right sectors or stocks, you’re either losing money or not making very much.
Based on the recent bottoming price action and move up on Friday, it suggests two things immediately.
First, what has shown relative strength and moved up on Friday should continue to do that.
Next, that it is also created a significant “line in the sand” of support — that being the recent low made over the last two weeks.
Do We have an All-In Green Light?
The markets here and abroad are taking relief in knowing what is, rather than what “may be” and that’s a positive sign. And the wrong-way option traders are still betting on the market collapse.
Historically, the markets are going to go up in the short term until they either turn bullish or at least become neutral. Remember that most markets are still sideways this year in a relatively wide range.
This recent bullish turnaround does not mean that these tariffs are not having a negative effect— not a huge one anyway.
That being said, it is possible that the perfect storm for a bear market may be brewing?
The belief that these tariffs are going to slow the economy and affect the profits of companies that do business overseas is dragging intermediate- to long-term interest rates lower over the last two months.
This is happening while short-term interest rates are moving higher, which should have been happening for two years now. And the FED is expected to raise short-term rates further this year
The inflection and possible inversion of long- and short-term rates are getting closer.
And while the difference between the longest and shortest term rates have a ways to go before they would invert, the distance between the five-year and 10-year is extremely close to each other.
Of course, we will continue to monitor these and update you when and if they actually do invert.
Dow Jones Industrial Average
Above is the chart of the Dow Jones Industrial Average that we review each week.
Last week, I said “Daily price pattern above rarely results in a significant move higher without more erratic price action. And while we still cannot ignore the possibility that the Dow could move lower toward that area of MS, the bullish seasonal tendency in front of a holiday and the fact that options traders are betting on that to happen, make that possibility less likely.”
That’s exactly what happened in this index.
It tried to go lower at the opening of trading on Monday but as mentioned, that was unlikely to happen. From the prior week’s close, it didn’t move up much either and the erratic price action anticipated played out.
This week, we’ll see if prices can clear the recent highs and Topping Tail (TT) directly above. While the low of this recent consolidation is the ultimate support line, it’s likely that if we see a move below 24,200 that low will be breached.
Below that area are the lows that have held throughout this year.
Until something changes, the theme this year has been not to get too bullish or too bearish and that continues to be the same.
Market Overview Video
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NEW STOCK TRADE IDEAS
Below is a daily chart of Lululemon Athletica Inc. (LULU).
Trade: Over $129.58, consider buying stock.
Technical Setup: Anticipated Breakout after Bullish Pro Gap on June 1st followed by bullish multi-week consolidation above r20/50-MA on the daily, bullish weekly.
Stop Loss: $122.46.
Below is a weekly chart of HollyFrontier Corporation (HFC).
Trade: Over $69.95, consider buying stock.
Technical Setup: Master Trader Buy Setup and Bottoming Tail above the r20/50-MA on the weekly chart, bullish retest on the daily.
Stop Loss: $65.76.
Below is a daily chart of Yext, Inc. (YEXT).
This is our open trade as shown in the Open Trade Tracking Sheet: 6/29: YEXT – Bought stock at $19.13. 7/7: Move Stop $17.90.
7/9: However, over $20.02, consider adding or buying the stock if not already long.
Below is a daily chart of Lennar Corporation (LEN).
WATCH ONLY: We like the Deep retracement into resistance and above the converging 20/50-MA after the Breakdown Failure, will watch.
NEW OPTION TRADE IDEAS
7/9: ACN – Over $165.56, consider shorting Jul (7/20) $162.5/157.5 bull put credit spread (12 DTE) for mid-point but a limit of $.55/share (closed at $.70/share). Bullish consolidation following +123 continuation to all-time highs after Bull Gap to r20-MA daily. Stop Loss: $162.78.
Below is a daily chart of Sogou Inc. (SOGO).
Trade: Over $10.84, consider shorting Jul (7/20) $10/7.5 bull put credit spread (12 DTE) for around closing mid-point of $.30/share.
Technical Setup: Bullish reversal on Minor Support and the r50-MA on the daily chart.
Option Strategy: Bull Put Credit Spread (BPCS).
Stop Loss: $9.98.
Below is a daily chart of Momo Inc. (MOMO).
Trade: Over $46.69, consider shorting Aug (8/17) $40/35 bull put credit spread (40 DTE) for around closing mid-point of $.60/share.
Technical Setup: Breakout from consolidation on Support following Bear Gap Failure on Minor Support made bullish Retest on the daily chart.
Option Strategy: Bull Put Credit Spread (BPCS).
Stop Loss: $41.83.
VIDEO REVIEW OF OPEN POSITIONS WITH TRADE UPDATES
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Master Trader and You Building Your Financial Future Together
Happy trading! If you have any questions or comments, please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com
All the best,
Greg Capra
Managing Director of Master Trader
Trading the Pristine Method — Origin and End
Dan Gibby
Chief Options Strategist
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Twitter: @GregCapra
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