While the broader markets made three steps ahead last week, they took two steps back and ended the week slightly positive. That resulted in many of the broader market indices displaying a Topping Tail (TT) on the weekly timeframe.
Topping Tail candles tell us that sellers took control and suggests continued selling and lower prices. While that may be what happens, the fact that the recent support that has been created is not that far away.
While any day or day-to-day move may seem meaningful, the bigger picture continues to suggest that the upside or downside is limited. In other words, the expectation is for continued choppy price action.
Our breadth market internal reached a bearish extreme in the middle of the week but has now returned to neutral. Sentiment continues to be neutral, so our internals are not providing us any guidance as to the end of the chop.
From an inter-market analysis guidance perspective, crude oil continues to be strong and holding the area of the recent highs. There is no immediate price resistance to the left and the most recent swing low is just below $66.
Strong demand for crude oil is an alignment with the news of an improving economy and strong employment.
The advance in interest rates that stalled in February corrected sideways to lower into the beginning of April. From the April low, yields chopped higher and accelerated higher at the end of last week.
The 5- and 10-year yields have already made new recent highs, but the 30-year has not yet; however, it looks like it will soon.
These yields moving higher are somewhat of a “double-edged sword.” There have been many recent comments from different commentators about a narrowing yield curve and its “potential bearish” effect on the equity markets.
What Does History Tell Us About Yields?
Historically, not until the yield curve actually inverts does it become bearish. Even when inversion does happen, the lag time to a bear market correction can be several months to a year. I guess they have to “worry about something” and fill up media air time.
This move higher in interest rates is actually what is needed to avoid yields inverting. Three-month yields have been moving up for quite a long time already, so the long end up as well avoiding the short end catching up.
In addition, long-term yields move higher when there is a demand for money. That too is in alignment with the news of an improving economy and strong employment. So what’s the problem?
There is another side of the sword that worries stock market participants as it relates to interest rates. As yields move higher, they eventually become attractive to investors as a lower risk place to put money. So some money goes into bonds instead of stocks, which equals less demand for equities.
Medium- to long-term interest rates are higher now than in the last 8 to 9 years and that did not hurt equities. However, if the yield curve inverts –and it’s not close to doing that now — then there is a real problem for equities.
With that being said, the intermediate- to long-term view on equities is that this choppy schizophrenic market will eventually resolve itself to the upside.
Reported earnings are going to pick up considerably this week with names like Google, Amazon, Intel, Starbucks, Ameritrade, Boeing and other stocks from a multitude of sectors. Always check earnings dates prior to putting on a trade.
During earnings season, there can be a tendency to be less active on our parts because of a large number of stocks that are reporting. We are not going to be putting on a position with options or swing trading long or short the underlying when earnings are going to be reported in the coming days.
This will not stop us from trading S&P options that expire in a few days or day trading individual stocks. The best way to take advantage of those recommendations is to be with us in the Green Room during the trading day.
As a subscriber to this letter, you do get a significant discount.
DOW JONES INDUSTRIAL AVG.
Above is the chart of the Dow Jones Industrial Average that review each week. The Dow finished the week not far from where it started, but it was positive. The gain was just under 103 points or .42%.
The weekly range contracted a bit further; this week just less than 500 points, so volatility is contracting a bit further.
While the Dow was able to move above its 50-day moving average and into the resistance above, it could not hold above the 50-MA.
On Friday, downside momentum increased but did not negate the recent choppy uptrend. For the short-term bullish point of view, buyers need to step up not far from current prices. Ideally, prices will hold above 24,200.
A close below 24,200 would be short-term bearish; however, the choppy slop area that’s not far below should put a floor there.
Going with the bearish scenario, a move into that area below would ideally break marginally through it into the unfilled gaps marked.
I say ideally because that would obviously violate the recent lows, make a new low on this year, which would push breadth and sentiment to bullish levels.
In addition, the weekly charts would then show a new low that occurred on slowing momentum. Of course, a reversal in that area does need to occur before taking a bullish view.
Should we see this downside scenario unfold, you will likely begin to hear about head and shoulders tops in the NASDAQ Composite and NASDAQ 100 (QQQ).
It’s difficult if not impossible to determine the direction of prices from an intermediate-term point of view when there is no direction — like now.
For that reason, I am providing you multiple scenarios and, of course, will update as clarity comes and Mr. Schizophrenic takes a vacation.
BROADER MARKETS
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TREND MATRIX AND INTERNALS
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NEW STOCK TRADING IDEAS
No official trades until we get clarity early in the week as discussed above, but here are some bullish watch items.
Below is a daily chart of ProShares Short 7-10 Year Treasury (TBX).
WATCH ONLY: We will be watching on a pull back for bullish entry for the reasons discussed in the video above on yields.
Below is a weekly chart of Carvana Co. (CVNA).
WATCH ONLY: Bullish Breakout to all-time highs all time frames. We will be watching on a pull back for bullish entry on the daily chart.
Below is a daily chart of Chart Industries, Inc. (GTLS).
WATCH ONLY: Bullish Breakout daily weekly but deep retracement. We will be watching for stabilization and possible bullish entry.
Below is a daily chart of Shopify Inc. (SHOP).
WATCH ONLY: Bullish 3-day consolidation following +WRB Breakout from Major Support and r200-MA, relative strength to broader markets which were retracing. We will be watching for bullish entry when SPY stabilizes.
SHORT SWING WATCH STOCKS: DISH and PAYX.
NEW OPTION TRADING IDEAS
Below is a daily chart of The Home Depot, Inc. (HD).
Trade: Over $180.25, consider shorting May (5/11) $172.5/162.5 bull put credit spread (19 DTE) for a limit of $1.05/share (closed at $1.27/share). It will not trigger unless it turns more bullish.
Technical Setup: Two inside days within range of Bullish +WRB Breakout from Major Support at r200-MA daily, bullish weekly and monthly.
Option Strategy: Bull Put Credit Spread (BPCS).
Stop Loss: $174.98.
Below is a daily chart of VMware, Inc. (VMW).
Trade: Over $137.15, consider shorting May (5/18) $120/110 bull put credit spread (26 DTE) for a limit of $.90/share (closed at $.92/share). Note: higher risk because spreads are very wide.
Technical Setup: Bullish consolidation after bullish Breakout from multi-month consolidation with r20/50/200-MA daily, bullish weekly and monthly.
Option Strategy: Bull Put Credit Spread (BPCS).
Stop Loss: $120.48.
Below is a daily chart of Workday, Inc. (WDAY).
Trade: Over $133.56, consider shorting May (5/4) $125/115 bull put credit spread (12 DTE) for mid-point but a limit of $.95/share (closed at $1.10/share).
Technical Setup: Bullish 3-day consolidation in top half of Bullish Wide Range Bar Breakout daily, bullish uptrend weekly and monthly.
Option Strategy: Bull Put Credit Spread (BPCS).
Stop Loss: $125.83.
Update on LFIN Short Puts
On 4/5, we shorted Apr (4/20) $5 naked puts for $.40/share. We said: “Selloff to Major Support all time frames, breakout hourly, high volatility income trade. NOTE: don’t know when earnings are, research yourself, high risk because of huge volatility. 4/6: Stock is halted by Nasdaq so there is nothing we can do at this time. When re-opens, will likely gap down; however, because strike so far OTM, the volatility crush will be a plus. Worst case scenario is we are assigned stock at $5, giving a cost basis of $4.60/share.”
Because LFIN remained halted, we discussed a number of times in the Green Room what the ramifications were to us as short put holders.
Well, we were obligated to buy LFIN (100 shares for each short put option) if the put holder gave his broker an exercise notice. BUT THE KEY QUESTION FOR THE PUT HOLDER WAS: DID HE WANT TO SELL/SHORT ME LFIN AT $5.00/SHARE???
Being halted, unless he had inside information confirming that it would eventually open below $5.00, then he would not exercise his notice; thus, letting the puts expire worthless. That is what happened, with the premium expiring for 100% Max Gain to us.
Thank you for being a loyal subscriber and feel to email us with any questions or comments on anything.
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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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