Today we’re going to look at four trades – one that closed, one that needs closing, a third that should be reinstated (but in the opposite direction) and a fourth that has great prospects.
You, of course, should feel free to partake in this Xmas profit madness with as many platefuls as you deem appropriate. And remember you can always start that diet after the holidays.
Let’s start with what has passed.
On the 24th of November, in a letter called Go Suck on a Fish, we opened a short straddle on Tyler Technologies (NYSE:TYL). We sold the TYL December 170 PUT and CALL for a total credit of $995.
And how did it end?
Nicely, in fact. Our short call closed in-the-money, so we’re currently short 100 shares of TYL at 170, creating a losing position of $705 (TYL now trades at $177.05), while the short put expired worthless. Buy back the shares at the market and you net a profit of $290 on the initiative (995 – 705).
Good work and congratulations if you got it on.
We note, too, that the resulting profit helps us cut down on the loss we suffered in our former trade on TYL, in which we were set back exactly $746. That means we’re now down $456 against arch-villain Tyler, and we ain’t giving up. Our next parry in the battle to acquire the undisputed title of Wall Street’s Master Money Dominatrix now follows.
But first, a look at the chart –
Here’s the situation –
We’re short 100 shares of TYL at 150, but our breakeven (after today’s successful effort) is $167.30.
We now expect a strong move from the stock, as she’s nearly finished working off the froth that sent her stratospheric back at the beginning of October.
To wit –
- RSI and MACD have calmed significantly, working their way back to their respective midway waterlines (in green).
- Volumes are stable (blue).
- And the last ten weeks’ price action has been tightening itself into an increasingly narrow coil (in red), a pattern that points to an imminent, significant price break, though in which direction we can’t be sure.
That said, on the downside, we’ve got good exposure via our open short position, and, indeed, the 137 day moving average (deep red line @ $152) would likely form the next line of support in the event of a selloff.
On the upside, any breakout would probably push the stock to new all-time highs in the vicinity of at least 185 – if our technical read is correct.
And because of all the foregoing, we’re now recommending the following three actions.
Here is how to play it and profit:
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- First, we’re urging you to sell the March 170 PUT for $8.00. Should the stock fall to that level by expiry, it’ll trigger a long position that will immediately close out our existing short, giving us a profit on that venture of $530. Remember: if you’re short two or more board lots, be sure to sell the same number of PUTs.
- At the same time, we can’t take any chances that our current short position will rise any further into the red. For that reason, we’re calling on you to place a stop buy order at exactly TYL 181, as that line appears to be the breakout level for the stock at this stage. Should TYL venture higher from there, we’ll almost assuredly see it fly vastly higher. Please place the stop.
- Finally, we want to profit from any upside breakout. And for that reason, we’re instituting a bullish ratio spread that looks like this – sell one TYL January 165 CALL for $13.10 and buy two January 175 CALLs for $6.00 each, for a total credit on the trade of $1.10. Your upside breakeven for the ratio spread is TYL $183.90.
And may the horse be with you.
We turn our attention now to a technical pattern that’s sprung up on a number of leading charts from across the investment spectrum. It’s a Japanese candle pattern, and if we’ve read it correctly, it portends a potentially dangerous turn of events for the near future.
Before we show it to you, however, we want to warn that even though it’s bearish in nature, it’s very reliable and, as mentioned above, it’s ubiquitous, that does not mean it’s now signaling an end to the current bull market in equities. It may denote a 1500 point drop for the Dow, or it may augur a much less drastic 200 point decline. It’s impossible to know. But it is fairly certain that we’ll see a pullback beginning almost immediately.
This is the Dow Transports for the last six months. Look especially at the expanded view of the action, in red –
We repeat that the bearish engulfing pattern you see on this chart is evident on a great number of sector charts as well as that of individual companies, including, just to name a few, Goldman Sachs (NYSE:GS), Apple (NASDAQ:AAPL), the S&P 500 and the Dow Jones Industrials.
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We’re therefore recommending that you close your deep-in-the-money SPDR Dow Jones Industrial Average ETF (NYSE:DIA) CALLs opened March 16th in a letter called How to Play the Last Burst of the Bull. The recommended purchase was of the January (2017) 90 CALLs for $90.00.
Today they sell for $83.40.
We take a 7% loss and wait for a safer re-entry point.
Finally, we initiate the following to take advantage of the potential decline that awaits.
As the transports look so fiendishly weak, we’re going to open a bearish ratio spread with the following specs –
Sell the iShares Transportation Average ETF (NYSE:IYT) January 137 PUT for $5.80 and buy two IYT January 133 PUTs for $3.05 each. Total debit on the trade is $0.30. Breakeven is IYT $129.
Wall Street Elite recommends you consider 1) the three TYL initiatives detailed at the outset of this letter, 2) closing your DIA 90 CALLs, and 3) opening a bearish ratio spread on IYT, as per the above details.
With kind regards for a very merry Xmas to all our readers,
Hugh L. O’Haynew