The S&P 500 and the NASDAQ 100 started to outperform the Transportation Index and the Russell 2000 Index last week. The latter two have outperformed the former two indices by about 2 to 1 percentage-wise since their low in August. However, year-to-date they are still lagging behind. Maybe they will catch up!
Historically, August is supposed to be a bad month for the broader markets; so much for historical seasonality. Seasonal tendencies are a useful tool, but like any technical tool, it has to be used in the context of other technical concepts. In other words, all technically based decisions should be a combination of trading tools.
August did set a high for the broader markets but after some time of chopping a bit lower, it was becoming clearer that a correction of significance was becoming less likely.
In the September 7 letter, I said, “We still must keep in mind that the markets are into a historically bearish time of year. However, up until this point, they have refused to show any real weakness to suggest they’re going to succumb to that historical time frame.
There are historical guidelines, which can serve us well as a guide, but we don’t trade guidelines alone. Price has to confirm any guideline or market internals.”
I added “The area of Major Support is rising and Major Resistance is moving lower. These reference points getting closer typically proceeds a move in one direction or the other. The direction is often in the direction of the long-term term, which is still up.”
So what now? Almost any short-term measure of being extended exists now. Therefore, we are looking for some corrective action this week. I’ll cover the technical charts in the broader markets video.
DOW JONES INDUSTRIAL AVG.
Above is the chart of the Dow Jones Industrial Average that we review each week. The dates marked on the chart signify the day of a Monday Master Trader Advisory Letter. If you go back to those dates, you will see what the chart showing at the time of the letter.
Last week, prices moved straight up from what now is marked as Major Support (MS). The move up is vertical and steeper than the one that preceded it. Historically, this is not sustainable and suggests a retracement. That would be the norm and we are expecting that — especially in the Russell 2000 Index.
As I always do, I consider another scenario as a backup. But this scenario seems “irrational” at the moment. The other scenario is a continued move higher that in all likelihood would be a blow-off or climactic move that would lead to a larger correction.
Friday was an inside day (traded inside of the prior range) after multiple days moving higher. Use Friday’s low as the first reference point of support that may trigger a short-term pull back. If demand continues as strong as it has, that pull back will not get to the Minor Support (mS) below.
I added the 50-MA to the chart this week to provide a reference point of distance between it and current prices. This year, the only time the Dow was further away from the 50-MA was in March, which also had an accelerated move higher that ended with a gap up.
That gap higher did not result in prices falling that day. Prices actually ended near the day’s high and the next day was the bearish reversal day. So a continued move higher and or a gap higher should lead to a correction. However, a pull back that starts early this week would actually be constructive to the long-term bullish trend. Stay tuned.
BROADER MARKETS
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TREND MATRIX AND INTERNALS
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New Trade Ideas
Below is a daily chart of Oasis Petroleum Inc. (OAS).
Trade: Consider selling the following $1.00-wide Iron Condor: sell Oct (10/20) $9/10 bear call spread and sell Oct (10/20) $8/7 bull put spread (11 Days to Expiration (DTE)) for current mid-point of around $.25/share.
Technical Setup: Range bound daily (pulled back from bullish breakout but with congestion resistance overhead), time decay strategy.
Option Strategy: Iron Condor (IC).
Max Gain: Credit received, 25% ROI ($.25/.75) if expires worthless.
Stop Loss: None for now.
Below is a daily chart of Macy’s, Inc. (M).
Trade: Under $20.49, consider shorting Oct (10/20) $21/23 bear call spread (12 DTE) for mid-point (closed at $.35/share).
Technical Setup: Bearish consolidation following Bearish Wide Range Bar (-WRB) from Sell Setup on daily, with bearish downtrend weekly and monthly.
Option Strategy: Bear Call Credit Spread (BCS).
Stop Loss: $21.22.
Below is a daily chart of Hewlett Packard Enterprise Co. (HPE).
Trade: Over $15.05, consider buying the stock (half size for now since market extended).
Technical Setup: Breakout from bullish consolidation after Wide Range Bar Breakout to new highs all time frames.
Stop Loss: $14.05 initially.
Below is a daily chart of AXIS Capital Holdings Limited (AXS).
Trade: Under $56.00, consider shorting the stock.
Technical Setup: Breakdown from bearish consolidation under d 20-MA daily and weekly charts.
Stop Loss: $57.62 initially.
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Description of Master Trader Directional and Income Option Trades can be seen HERE
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All the best,
Greg Capra
Managing Director of Master Trader
Pristine’s Founder and Creator of the Pristine Method
Dan Gibby
Chief Options Strategist
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NOTE: Master Trader will show opening and closing prices of all stock and option trades. We do not recommend proper share size for your particular trading style, risk tolerance, or account balance. We urge you to calculate your own share size based on your individualized risk parameters, Trading Plan, and familiarity with the proposed trade strategy and risk.
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