She Thought She Was Going to The Dentist…
When I was young I had a friend whose father used to repeat the same lesson to him over and over again. His dad was an Englishman, so it helps to hear his words with that distinct pompous accent that accompanies so many who hail from the Land of the Rose.
He used to say:
The only ship you should never embark upon is a partnership.
Can’t tell you how many times I heard that.
As it turns out, we parted ways when I was 11 or 12, but my buddy (we’ll call him Denny) grew up to be a professional thief. I read about him several times thereafter in the papers, always with pictures on his way into or emerging from a courthouse, accused of every possible white collar deceit you can imagine. Did seven or eight years – twice – last I heard.
The good news is Denny never had any accomplices, from what I understand. Respected his father, old Denny, after all. There’s something to be said for that.
Let’s go 50-50!
We got to thinking about our old comrade because the market today is splitsville, schizo-undecided, with an equal chance of veering higher or lower, as far as we can tell. But it’s a thief either way you cut it.
And that’s revealed most clearly from several charts (that we’ll show you below), that exhibit a ‘flat-line’ posture, a development more indicative of indecision than anything else.
We’ll get to those charts in a moment, but first, it’s indecision in all its fullness that we see in the AAII weekly sentiment charts.
Have a look here –
Last week we reported on a rare condition in the weekly American Association of Individual Investors sentiment survey, with Bears comprising the majority of those polled, followed by ‘Neutrals’, while Bulls pulled up the rear.
Our research shows that that phenomenon has twice before offered a meaningful contrarian, bullish signal for the markets (over the following three months), and while the condition was realized last week, we were even more surprised to see that it barely budged for the last seven days!
This is either a statistical oddity, friends, or a signal that we’re on the verge of a wild spurt higher.
But before we speculate on that, have a look at those ‘flat-line’ markets that we referred to above.
The first is the Dollar Index for the last six months.
The takeaway here is that the price of the dollar appears to have gone into a deep sleep, like a patient under laughing gas. She’s moving sideways and both RSI and MACD show an underlying equilibrium that usually precedes a more violent breakout.
Have a look now at charts for gold and silver, both of which are related to the dollar, since dollar movements strongly affect the precious metals. All the same, it’s a curiosity to see the PMs idling in such a manner, unmoved by any other market forces that normally roust and toggle them about.
Past action reveals that similar sideways meanders lead to viciously sharp moves once the calm lifts.
Now look at a chart of the Dow Transports, a sector that generally leads the broad market (since delivery of industrial goods has to be booked months in advance of completed production).
Here, too, you can see the sideways grind so typical of a market where bulls and bears are locked in a battle for pre-eminence, a phenomenon technicians refer to as ‘congestion’ (in red).
All told, the market is spinning, friends, and our trade for the week is based precisely on that reality.
But before we get to it, we have to report on one open initiative.
It was opened just last week in a letter called Neither Here Nor There. There, we urged you to consider selling a diagonal strangle using the PowerShares QQQ Trust (NASDAQ:QQQ) by selling the QQQ April 13th 150 PUT for $1.60 and the QQQ April 20th 162 CALL for $1.44. Total credit on the trade was $3.04.
When we put on the trade, volatility was exploding, back to its highest levels since the initial downturn back in February. And under those circumstances it made perfect sense to sell options.
But as we’ve indicated above, a number of markets and assets have been reeling sideways for a wee too long, and we’re not sure which way the break will come. We do believe there will be a break however, and we’re also convinced the market is going to make up its mind in short order – could be over the next few days, even.
That being the case, we’re urging you to cash out of the strangle today for a nice gain.
The QQQ CALLs now go for $1.08 and the PUTs for $0.71. Buy them both back and you net $1.25 in a mere seven days. That’s 70%, buddy.
Ten percent a day!
Now Back to Our Trade
Whereas the last couple of weeks offered a prime opportunity to sell premium on the back of increased volatility, this week, we feel the likelihood of a sharp move after a sideways slide warrants the opposite strategy – a long strangle.
We like the long strangle strategy because it’s cheaper to enter than a straddle, and it can pay off just as well, if not better, if the move is big, and occurs later in the life of the option.
And we’re using that wackiest of all stocks, Tesla Motors (NASDAQ:TSLA), to launch it.
Here’s the chart –
Tesla has made a round trip move from $345 to $245 and back to $300 in less than a month.
And we’re convinced the action is just heating up.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you consider buying the TSLA April 20th 340 CALL for $1.47 and the TSLA April 20th 255 PUT for $2.07. Total debit on the trade is $3.54.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew