After last week’s monster week of earnings was reported, the broader markets ended almost where they started — a non-event? Well almost, not really. The Transportation Index fell sharply on Thursday violating its daily uptrend. And many sectors and stocks fell on Thursday with Internet and technology leading.
Friday was a disaster for tobacco stocks. Altria Group (MO) was down almost 9.5% on the day, but recovered from its intra-day low of being down just over 14% on the day! Can you imagine the government wanting to reduce the addictive nicotine that is loved by so many smokers?
I am not a smoker, but I really dislike the government (politicians) telling us what they think that we can and cannot do, or trying to protect us from ourselves. The cigarette pack says it will kill you. What more of a warning does anyone need!? Maybe the tobacco industry’s lobbyists failed to make the appropriate donations? Does that sound cynical of our government? Hum…, I said enough.
There were some nasty breaks in many stocks last week and the broader market indices masked the underlying carnage. However, money flowed into the hated Retail Sector and the Energy Sector — both of which broke their downtrends on the daily time frame.
Sentiment is still way to bullish, which is bearish. Based on that, with the break in the Transports and various stocks, odds are good they’ll be more of a correction. That being said, most of the sectors that have been leading are still in uptrends.
Owning a broader market ETF like SPY, QQQ or IWM or a sector ETF like XLF, XLK — or even the hated Retail XRT — may not be as rewarding as owning an individual stock. But it’s highly unlikely that you will ever be down 10% overnight either.
DOW JONES INDUSTRIAL AVG.
Above is the chart of the Dow Jones Industrial Average that we review each week. The Dow made a new all-time closing high on Friday and may be on its way 22,000. Minor Support (MS) and Major Support (MS) are marked. As long as prices stay above MS, the trend is up.
Interestingly, not one of the Dow 30 stocks made a new closing high on Friday. However, Caterpillar (CAT), United Technologies (UTX), Boeing (BA) and Walmart (WMT) are within striking distance. Overall, among the 30 stocks in the Dow Industrials, 15 of them were down on the day, and 15 up on Friday.
Apple (AAPL), a Dow stock, fell with the other technology stocks on Thursday. Apple is not far from a new all-time high — and it will have its chance at making it there on Tuesday when it reports earnings.
Since it is reporting after the close, the move may come at that time. Whatever those earnings are, it should have the effect of moving the Dow and the Technology sector on Wednesday.
BROADER MARKETS
[s3mv fileName=’July+2017+Letter/7_31_17_broader_Markets_letter.mp4′ fileType=’video’ source=’s3′ width=’800′ height=’480′ splashImage=” preLoad=’Y’ autoPlay=’N’ belowVideoHTML=” cuePoint=” redirectURL=” pauseAtCuePoint=’N’ fixedSizeVideo=’N’ isSecure=’N’ bucketname=’mastertraders’]
TREND MATRIX
[s3mv fileName=’July+2017+Letter/7_31_14_Trend_Sectors.mp4′ fileType=’video’ source=’s3′ width=’800′ height=’480′ splashImage=” preLoad=’Y’ autoPlay=’N’ belowVideoHTML=” cuePoint=” redirectURL=” pauseAtCuePoint=’N’ fixedSizeVideo=’N’ isSecure=’N’ bucketname=’mastertraders’]
MARKET INTERNALS
Breadth, which had just moved slightly into a bearish extreme, backed off last week to a neutral level. Sentiment is still at a bearish extreme and Thursday’s drop did little scare off bullish option call buyers.
That is a bearish confirmation of last week’s sentiment signal. Historically, the broader markets make little upside progress with sentiment at a bearish extreme. However, it does not mean the uptrend will end, prices could move sideways as the extreme is worked off.
New Trade Recommendation
Below is a daily chart of Tiffany & Co. (TIF), $96.34.
Trade: Over $96.50, consider shorting Aug (8/18) $91 naked puts (18 DTE) for a minimum of $.36/share (closed at $.39/share mid-point). Note: A put spread is preferred but the spreads are so wide for the OTM strikes, it is hard to recommend one at this time until the market opens and spreads tighten.
Technical Setup: Breakout daily and weekly, following failed bear gap breakdown (which shows as a bullish reverse head and shoulders pattern on the weekly), uptrend monthly and great relative strength to the sector.
Option Strategy: Short Naked Puts (SP). Similar to bull put spread except not buying the lower strike put. We sell put strike price below support where the pattern suggests that the stock will not close under at expiry. In exchange for the premium received, the put seller has the obligation to buy the underlying stock at the strike price on or before expiry.
The Max Gain is the Premium received, which is realized if the stock closes above the short put strike at expiration. The return on investment (ROI) is the credit received divided by the margin required to hold the position. The break-even is the short strike price less credit received (i.e., also your cost basis if assigned the stock).
Considered a mildly bullish strategy since we are not buying calls or stock and just calling a short-term bottom in the pattern. Trade has positive theta (meaning you make money on time decay) making it a high probability trade since we time entry with the technical pattern.
Max Gain: Credit received. Cost basis if assigned is short strike minus Credit.
Stop Loss: $92.18.
Master Trader July 27th Monthly Educational Webinar Recording
Below is the link to the recording of this month’s meeting from last Thursday:
https://attendee.gotowebinar.com/rt/5052793975035379969
Adjustments and Comments on Open Advisory Letter Trades Note: Our Trade Updates are timely posted in a separate Report in the Member’s Area. Please see that document for a current reflection on all Open and Closed Trades since the spreadsheet updates immediately and will always be more current than this e-mail update. Thank you.
NOTE: Please see Master Trader Guidelines for Trading the Open and Gaps in Member’s Area for rules on trade entry, gaps, etc.
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
Pristine’s Founder and Creator of the Pristine Method
Dan Gibby
Chief Options Strategist
Follow Greg on Twitter, YouTube, and StockTwits to get real-time updates and education:
Twitter: @GregCapra
Stocktwits: Greg_Capra
youtube.com/c/mastertrader (please subscribe to receive all the timely stock market updates)
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.
NOTE: Master Trader and its representatives might have existing positions in these and other trade recommendations before or after suggested herein. Additionally, we often manage them differently for internal purposes based on different risk parameters than noted herein.
