We are right into the peak of the summer doldrums for the markets. So the broader markets’ slow activity should be expected. For another week, the broader markets have ended close to where they started the prior week. Since that is the case, there won’t be a lot more to add to that in this week’s broader markets video.
Many of the stocks that did have moves of significance did so on their earnings reports. Even GoPro (GPRO) — that seemed to be left for dead — came to life on its earnings. After hitting almost $100 a share in 2014, maybe its basing between $8 – $9 over the last year has put in the low?
Small-cap companies — and some big — that once were high flyers and then fall sharply back to earth, rarely ever see their old highs. Something to keep in mind if you ever consider not adhering to a stop-loss.
The sell signal from our market internals in last week’s issue has been dissipating over the last couple of weeks. The strongest part of the signal came from sentiment having moved to an extreme bearish level. The breadth internal marginally made it into a bearish extreme level, so the signal was weak.
The sentiment internal is based on the activity of options traders. Option traders that bet on the market’s direction almost always (historically) are lined up on the wrong side at turning points. So far, this one has been a correction through time (sideways), rather than price (a downward move), and that is bullish.
Most of the “big dogs” have reported their earnings already, but there will be a few reports of interest this week. For example, DIS, KORS, MNST on 8/8 and NVDA, SNAP, M and JWN on 8/10.
DOW JONES INDUSTRIAL AVG.
Above is the chart of the Dow Jones Industrial Average that we review each week. There are always periods of inactivity or choppy price action like what we are seeing now in the S&P 500 and the NASDAQ 100.
Before that type of choppy price action starts, it is not always obvious ahead time that it’s coming. But our internals did tip us off that risk to the long side was increasing.
However, almost to the day of that market internals signal, the Dow began its advance. Could this be manipulated to suck in the last holdouts?
There is no way to know for sure, but it certainly does seem odd. Odd that the most widely quoted index continues to make all-time highs each day on its own.
And if it did not catch your eye looking at the chart above, notice that the closing price is the same as the high of the day. This does not happen too often.
Historically, when it happens after a multi-day run to the upside a short-term top has not been far off.
Since we as technical investors and traders look at charts as a representation of others expectations about the future, this run and close means that market participants (from this chart’s point of view) believe prices are headed higher and they have little concern.
I don’t know about you, but I would not be buying into the close of trading – on a Friday – after a multi-day run straight up.
Also notice that Wednesday and Thursday the Dow moved sideways for those two days.
So Friday’s gap higher was a mini breakout that ended with a strong close. This makes Friday’s low and obvious line in the sand that should not be violated on a short-term basis.
That two-day consolidation mid-week is not going to hold prices if they fall under Friday’s low. Under Friday’s low would be a shock to those aggressive buyers.
Minor Support (mS) is far away and the only obvious reference point of strong support. But.., maybe one of the unfilled gaps below holds.
If this advance is going to continue higher, either price has to accelerate higher from here (a blow-off move) or create a new level of higher support on a pullback to make a higher low — and then move higher.
BROADER MARKETS
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TREND MATRIX
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MARKET INTERNALS
Breadth and Sentiment are back to neutral
NEW TRADE RECOMMENDATIONS
Below is a weekly chart of SPDR S&P Regional Banking ETF (KRE), $54.98.
Trade: Consider buying Stock over $55.42.
Technical Setup: Bullish weekly consolidation within strong uptrend monthly.
Stop Loss: $53.78.
Below is a daily chart of The Home Depot, Inc. (HD), $152.75.
Trade: Consider selling the following Custom: sell Aug (8/18) $157.5/162.5 bear call spread and sell Aug (8/18) $146 naked put (11 Days to Expiration (DTE)) for around current closing mid-point of $1.16/share (see option order quote screen below):
Technical Setup: Range bound, time decay strategy.
Option Strategy: Similar to Iron Condor (IC) except selling naked put and not a put spread (because there is not a sufficient OTM Strike).
Stop Loss: None for now.
Below is a daily chart of Automatic Data Processing, Inc. (ADP), $111.39.
Trade: Over $112.85, consider shorting Aug (8/18) $106 naked puts (11 DTE) for a limit of $1.00/share (it is spready, so we want price improvement).
Technical Setup: Pull back after Wide Range Breakout all time frames on Increased Volume.
Option Strategy: Short Naked Puts (SP). 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 at the put buyer’s discretion.
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: None for now, will manage.
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
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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.
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.
