We’re now at half-time. According to the charts, we’ve got a break in the action, as traders assess the latest damage and try to figure out which way the market’s headed next.
A great number of big name stocks have started to regroup here, and there’s a chill feeling that’s settling over the heat that prevailed earlier in the week.
It’s all a bit deceptive, truth be told. Any time there’s a consolidation and volatility subsides, the feeling is one of relief, that the selling has concluded and that we’re back to routine. But nothing could be further from the truth.
Volatility begets volatility, and a brief break in the action is very often the market’s way of reaching into the weakest traders’ pockets and diabolically ripping out a bigger batch of their hard earned cash.
We’re not saying the next move is necessarily down – no one can know that for sure. Just that we shouldn’t get duped by the siren song of any lull in the action.
Take a look –
We start with the transports deliberately. This is a sector that has yet to cease sliding these past ______. Wednesday’s trade has been extreme in its decline and that should be worrisome for anyone considering opening a long position today.
As we’ve mentioned repeatedly over the years, the trannies are a leading indicator, revealing upcoming deliveries to both manufacturers and marketers – as good a sign as any of the health of the economy.
The Economy and the Stock Market
If the transports are indicative of weak orders overall, what can be said about the new age tech stocks that are less reliant on moving product, companies like Google and Facebook, Netflix and Tesla – the new era’s high flying growth names?
Tesla down 14.5%
Google down 5.2%
Facebook down 6.1%
Netflix down 3.7%, and
Amazon down 11.1%
In short, if the market wants to take a breather here, so be it. But all the cards appear to be bearish at the moment, so that’s the hand that will likely succeed going forward, and that’s the hand we’re going to play today, as you’ll shortly see.
Closing out a Wham-Doggie Winner
Let’s look now at a trade that made us a big whack of cash in a very short period of time. It was launched on the 17th of December in a letter called The Turning Radius of an Aircraft Carrier. But in order to better understand how the money was made we need to go back even firther, to a trade we opened three weeks prior in a letter called Straddling the War, Markets, Housing and Frida. Both trades used retailer extraordinaire Home Depot (NYSE:HD) as the underlying security and both were bets on volatility.
Take a look first at a chart of HD for the last six months to get a clearer picture of exactly what happened.
After a steep rise in late November that, in our opinion, wasn’t entirely justified, we suggested traders would let Home Depot drift for a while, allowing the most recent gains be digested before economic and corporate news indicated the stock’s next move.
We wrote –
With their shares up so quickly of late, we can’t pretend to be bullish on HD stock over the near term, though we do like their prospects for the long haul. At this time, the chart for Home Depot speaks to a cooling off period in the offing, and we intend to generate some money from it… HD has posted Q3 earnings and offered guidance for the coming year – there’s little left to entice new purchases.
We sold a straddle (red #1), a strategy that benefits when there’s little movement in the underlying, and precisely three weeks later (red #2), booked a 184% gain.
That same week, undaunted by our lavish success, cool, composed and perfectly steaming with wisdom, we reversed course. The technical picture indicated to us that a breakout of some variety was at hand and that buying a straddle was the way to profit. Indeed, long straddles are one of the best ways of padding the wallet when a sharp move either way is expected.
And today, after just such a wild move lower, we close our long straddle to the sound of cheering hordes, fanfare and the trumpets’ glorious blast.
Yes, of course.
We urged you to open your long HD straddle using the HD January 22nd 132 CALL, then selling for $3.20, and the February 132 PUT going for $2.88. Total debit was $6.08.
The CALL sells for $0.08 and the PUT for $10.35.
Sell them both, or just the PUT. It’s possible that with one more week’s trade before expiry, a bounce higher in HD will make the CALL more valuable. Either way, you net out a minimum of $4.27 on $6.08 down – a wild 70% for just one month’s measly patience.
Great, but is that it?
Hell no, friend.
Home Depot is once… twice… three times a lady for us. And we’re going to attempt to redeem her from captivity yet another time.
Let’s look at her chart (above) one more time to get some notion of what’s upcoming.
- A look at the RSI and MACD indicators shows that HD is in full bearish mode (blue boxes). This began two trading sessions back, when MACD fell below her waterline, confirming RSI’s submergence three weeks prior.
- At the same time, price action has come to rest on the 137 day moving average (at HD $122), normally a staunch support level, and one that we believe will hold HD’s price, if only temporarily.
- The intraday charts – 5 minute, 15 minute and hourly – all show a positive divergence (not seen here), indicating the current selling may be running out of steam.
So what do we do?
All told, the picture is one of near-term consolidation, with a slightly bearish bias, as we alluded above. And that lends itself perfectly to a put ratio spread.
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Options Trader Elite recommends you consider buying the HD February 26th 122 PUT for $4.95 and selling two (2) February 26th 116 PUTs for $2.49 each. Total credit on the trade is $0.03.
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Many happy returns,