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Will We Hold it Wednesday – Indexes Struggle to Regain their 200 DMAs

We're back!  

Yesterday was a wild one and today should be interesting as well as markets attempt to shake off a fairly catastrophic failure of their 200-day moving averages.  As you can see from our Big Chart, all 5 indexes failed at some point, effectively earasing 100 days of gains and threatening to turn negative for the year.  New lows gave us new bounce lines to look for and, yesterday morning, we reran our 5% Rule™ and came up with:

  • Dow (/YM) 24,800 (weak) and 25,300 (strong) 
  • S&P (/ES) 2,710 (weak) and 2,780 (strong)
  • Nasdaq (/NQ) 7,080 (weak) and 7,230 (strong) 
  • Russell (/RTY) 1,530 (weak) and 1,575 (strong)

As you can see, the Dow and the Russell are right on their test lines so we can pretty much make our bets this morning depening on which way those two levels (1,530 and 25,300) break but we think the market is set to give the strong bounce lines a good try, which makes /RTY a good lagging bet if it breaks above 1,530, with very tight stops below because failure there would be a very bad sign for all the indexes (in which case we could short /YM below 25,300 with tight stops above).  

We still have the same problems we have last week:  Crazy President, Brexit, Italy, Trade Wars, Debt, Iran, Saudi Arabia, Venezuela, Inflation, Economic Slowdown… combine the last two and we get the dreaded Stagflation!  NONE of these things have gotten better so the question is whether or not a 10% correction of a record-breaking rally is enough to put us into a rational zone or if we still have another 10-20% correction ahead of us?

While I'd say another 10% would be very likely, 20% seems a bit of a stretch because there are companies like Apple (AAPL) who are making fantastic amounts of money and have valuations that are well-justified and unlikely to suffer much from the above factors (the ones we know about anyway).  That does kind of put a floor on how far down we think things can fall but, spoiler alert, that's still more than 10%!  

My issue with the market all summer long is that traders have been ignoring the risks – much like they did in 2007 and they've been trading the market like it will go up and up forever and never, ever, ever run into any problems when, CLEARLY, things are actually not that perfect.  It's only when you can recognize the risks and imperfections, as well as the advantages and opportunities, that you can truly understand the value of the things you are trading.

Speaking of trading, I am scheduled to be on BNN's Money Talk tonight at 7:30 which means it's time to adjust our Money Talk Portfolio.  We did a review last Thursday and the Portfolio was at $97,037 with the S&P at 2,802 and, as of yesterday's close, we had dropped $1,394 to $95,645 but that's still up $45,645 (91.3%) for the year so not terrible but it lets us know we need to do a bit more to lock in the gains (ie. more hedges).  

  • ALK – A short put we are confident in, should gain another $3,275 at maturity.  
  • SQQQ – A good hedge that's $6,760 in the money but only showing net $3,450 out of a $10,000 potential.  Hopefully we lose the $3,450 because the market does well as it's simply insurance and not a bet.  
  • ABX – A long-term bet on gold that pays up to $12,500 and is currently on track at net $2,225 so good for a new trade with another $10,275 (460%) left to gain at $15.  

  • GE – Been in everyone's dog house but I like them long-term.  If they recover, could be a $15,000 net at $18 but we'll be happy with $6,000 at $15 and the current net is just $2,020 so call it $3,980 (197%) at $15 as a realistic goal.
  • GIS – A newish trade still good for a new entry with a potential return of $11,250 and currently net $2,315 so $8,935 (385%) more if all goes well.  
  • LB – Another sleeper but our goal is a modest $35 though we'll have to roll the 20 Jan $32.50 puts at $4.50 ($9,000) to 12 2021 $30 puts at $7.50 ($9,000).  At $35, this trade pays $30,000 and is currently trading at net $1,700 so a nice $28,300 (1,665%) at $35 would be great! 
  • WPM – Possibly my favorite as they are so undervalued.  The short Jan calls will expire worthless and, this low in the channel we can sell 10 2021 $17.50 puts for $3 ($3,000) and roll the 30 2020 $22.50 calls at $1.03 ($3,075) to 25 of the 2021 $15 calls at $4.40 ($11,000) and sell 25 of the 2021 $22.50 calls at $1.80 ($4,500) and buy back the 30 short 2020 $30 calls for 0.36 ($1,080).  So, to recap, we're essentially closing this whole trade and opening a new 2021 $15/22.50 bull call spread at net $2.60 ($6,500) and selling 10 of the 2021 $17.50 puts for $3 ($3,000) so our net/net on the new trade is $3,500 with a potential gain of $15,250 (435%) at $22.50.

We have a small hedge and I like our 5 spreads and the short put which, if all works out, these positions will make another $70,015 between now and 2021 so all we really have to do, between now and then, is check on them each quarter to make sure they are on track and this portfolio will gain another 140%.

Since we do have $85,740 in cash and are only using $30,000 in margin, we can add a hedge and a new trade:

As a hedge, I'd like to add TZA with a short put that pays for it:

  • Sell 5 CAT 2021 $100 puts for $10 ($5,000) 
  • Buy 40 TZA April $10 calls for $2.25 ($9,000) 
  • Sell 40 TZA April $15 calls for $1 ($4,000) 

The net cost of this spread is zero but we are obligated to buy CAT for $100 if it goes that low (20% lower) and that's not likely to be the case if our TZA bet fails to win.  The spread pays up to $20,000 and is currently $5,400 in the money so you can't lose unless the Russell is higher in April (which keeps us on the path to making another $70,015) and that should be good for the short puts.  

Also, just because they are such a good deal, I'd like to add a Micron (MU) trade idea:

  • Sell 5 MU 2021 $35 puts for $6.40 ($3,200)
  • Buy 10 MU 2021 $35 calls for $12.40 ($12,400)
  • Sell 10 MU 2021 $50 calls for $7 ($7,000)

That's net $2,200 on the $15,000 spread so the upside potential is $12,800 (582%) in two years if MU can get back to $50. 

A late addition for the live show is the Cannabis ETF (MJ), which TD Bank was kind enough to let us include in the show:

  • Sell 10 MJ 2021 $30 puts for $7 ($7,000) 
  • Buy 20 MJ 2021 $25 calls for $9.50 ($19,000) 
  • Sell 20 MJ 2021 $45 calls for $5.25 ($10,500) 

That's net $1,500 on the $40,000 spread that's currently $16,000 in the money with a $38,500 (2,566%) upside potential.  It's crazy volatile but a lot easier than trying to pick an individual winner in the Cannabis Industry!  

 

In fact, it's a little early but I think this may be my 2019 Trade of the Year and that means, since it pays $40,000, which would be a 4-year Premium Membership at PSW, I can tell you that if you buy an Annual  Premium Membership this month (October) and this trade doesn't make at least $10,000 by next November 1st (2019), we will give you another year of PSW Premium FOR FREE!!!!   You don't have to make the trade, we'll honor it anyway but I think it will be $1,500 in cash (plus margin) well spent!  

Today is a busy, busy day with 4 Fed Speakers (Bostic, Bullard, Mester and Bostic again) ahead of the Fed's Beige Book at 2pm, during our Live Trading Webinar so tune in for that at 1pm, EST!  Last week we made thousands of Dollars trading the Futures in the course of 2 lively hours so, unless you are busy making thousands of Dollars doing something else between 1 and 3 - why not give it a try?  

 


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  1. Good Morning.


  2. Good morning, All!

    Join us for our webinar at 1pm!

    https://attendee.gotowebinar.com/register/8401431414337972748


  3. RB/Phil- are you still holding rb longs? Data is somewhat bullish?


  4. Phil/Money Talk Portfolio

    Can we add the same trades that you suggested today, to the OOP portfolio?

    regards


  5. Good morning! 

    America is officially great again:

    No automatic alt text available.

    These are all over North Carolina.  Do you think the GOP will say something against this or will the President say it's unAmerican?  No, you don't think so, do you?  You think they are going to give this a pass, right?  Well WTF people???  How do we allow these people to represent US???  

    Image result for trump nationalist quote

    To be fair, Beattie was fired in August so another person probably wrote Trump's "I am a Nationalist speech" this week.

    “You know, they have a word. It sort of became old-fashioned,” Trump said in Houston Monday night. “It's called a nationalist. And I say, really, we're not supposed to use that word. You know what I am? I'm a nationalist, OK? I'm a nationalist.”

    /RB/Dave – Took a penny and ran.  Still have /CL as it looks strong but up $1,000 in an hour is good enough for me.

    OOP/Pat – I think I'd like to add MJ to the OOP but not sure about MU.  Officially, for the OOP:

    • Sell 10 MJ 2021 $30 puts for $7 ($7,000) 
    • Buy 20 MJ 2021 $25 calls for $9.50 ($19,000) 
    • Sell 20 MJ 2021 $45 calls for $5.25 ($10,500) 

    That's net $1,500 on the $40,000 spread that's currently $16,000 in the money with a $38,500 (2,566%) upside potential.  It's crazy volatile but a lot easier than trying to pick an individual winner in the Cannabis Industry!  

    We filled the bull spread but not the short puts yesterday, so maybe an adjustment some time if MJ never pulls back but there's nothing wrong with just the $5,400 bull call spread that pays $15,000 if all goes well.  


  6. T   might be a good day to follow Batman's idea to sell a few longer lated puts


  7. T/Stock – Sell any puts of stocks you are interested in while the VIX is high – it usually doesn't last. 

    Oil up 6.3Mb, Gasoline down 4.8Mb and Distillates down 2.3Mb so better than API but not a great report.


  8. No play as it's iffy at $1.845 and $67 on the button.


  9. Nas failed 7,100 – not good!  

    In the STP, we have 80 naked short SQQQ March $14 calls at $1.25, now $2.13 with SQQQ at $13.65.  I'm still iffy about covering but let's not take too much risk so let's pick up 80 of the June $12 ($3.30)/17 ($2) bull call spreads at $1.30 ($10,400) as they are well in the money and only lose if the market is going up nicely 8 months from now in which case our longs will be up $250,000 so we won't be worried about losing $10,400, right?  

    Overall, it adds about $30,000 of insurance (the upside potential) as well as letting the short SQQQs ride for $17,000 we gain if they expire worthless.


  10. FCX – Out with mixed report.

    FCX beats by .03, beats on revs; Lowers FY 18 Operating cash flow outlook, reaffirms Capex spend.

    Stock at 2 year low.

    Phil, any thoughts at this level ?




  11. Report: Agencies blindsided by Trump immigration order



  12. Put/Call Ratio at .97.  Not bearish enough.  No real fear here.


  13. Albo – where do you get the current day P/C ratio? What is your source?


  14. FCX/Albo – Not so terrible but now's not the time to jump in with all this market weakness.

    Not bearish enough/Albo – Well you know there's my theory that the dip buyers need to get burned 3 times before they learn their lesson.

      I'd call the Sept run – up one dip that was bought and now the quick bounce we just had so one more bounce of 2,700 and, if that fails – all Hell can break loose to the downside.

    • Chip stocks are set to open lower after Texas Instruments and STMicroelectronics earnings results forecasted slowing demand.
    • TI reported a quarterly miss on weak processor sales, which is pulling down rivals Cypress Semiconductor (NASDAQ:CY-1.5% and NXP Semiconductors (NASDAQ:NXPI) -2.2%. Micron (NASDAQ:MU) -0.8% and Intel (NASDAQ:INTC) -0.4% are also down premarket. 
    • Oppenheimer: “A diversified industrial/auto-heavy business model, run by a well-regarded management team, we consider TI’s 4Q cut to be one of the first credible signals of an early stage semiconductor cycle correction.” 
    • Related analyst actions: SunTrust was one of at least eight brokerages cutting TI targets and gets the award for biggest bear with its drop from $120 to $93.    
    • Previously: Texas Instrument drops after Q3 revenue miss on processor weakness (Oct. 23)
    • Previously: STMicroelectronics -10% on Q3 results, downside guide, TI pressure (Oct. 24)


  15. Europe started selling off before we did – it's possible they dragged us down into their close so I like /ES at 2,700, /NQ at 7,000 and /RTY at 1,500 lined up with /YM 24,900 as bullish plays – go long the laggard if 2 cross over but if ANY of them cross back under – GET OUT!!!

    /NKD up and down 100 already.


  16. Wow, those index longs are working out nicely!  


  17. Phil / NI (Ni Source)

    What are your thoughts on their upcoming earnings, the stock seems overvalued for a utility distributor and considering their 2 is to 1 split in 2015 seems to be trading at a higher multiple.

    Thanks as always

    Pat 



  18. /NI/Pat – I think the problem with all the utility companies is that they are losing customers to solar.  Not so bad up North, where NiSource is but it's a long-term issue for all of them.  They just had that explosion in Mass so gapped down and I guess you could say it's a one-off but I think they will have to spend a lot of money to upgrade ancient gas lines around Boston or the next explosion will hit them with a massive negligence lawsuit.  

    So not terrible but not exciting is how I see them.  I take it you are thinking of a short and I would have agreed before the 10% drop but now it's a bit of a wildcard.


  19. Back to our long spots on the indexes – /RTY 1,500, 7,000 on /NQ, 25,000 on /YM, 2,710 on /ES.

    Webinar time!  




  20. AT&T satellite TV numbers disappoint, shares fall


  21. U.S. Shoppers May Pay a High Price for America’s China Addiction








  22. Whats up with FTR today?


  23. POS


  24. FTR/CRS – I think it's because T had poor earnings and VZ also with troubles so expectations for FTR are dropping.  

    Meanwhile, in the course of the Webinar, my expectations dropped as the Nas sits on the 2.5% line.  We may be consolidating for a 10% move down, all the way to 6,400 so be very careful.

    • In the STP, we're going to buy 80 more of the SQQQ June $12 calls, now $3.95 so we'll have 160 of those. 
    • In the OOP, we'll add 50 of the SQQQ June $12 ($3.95)/18 ($2.45) bull call spreads for $1.50 ($7,500).

    I think we'll be all right in Money Talk, not worried enough to force the producers to make last-minute changes though, if it were my own show – I'd add a hedge!  


  25. Buying a few Jan MSFT calls for a dollar- fun trade

    May double, if not, so be it


  26. In the Webinar we were looking at 6,400 to 7,680 as a 20% run so we have a 4% weak retrace (20% of the run) which is 256 (to be exact) back to 7,424 and then 7,168 and they failed so now we're looking 250 lower at 6,912, which is the strong bounce line off 6,400.  If that fails, then you can throw out 7,680 as a mistake and it goes back to being all about 6,400 and the weak bounce at 6,656 and the strong at 6,912 and that means we would look for all the indexes to correct back to the Feb lows!  


  27. Phil / SQQQ hedge – your target at the at the at 6900 and 6400 ( NAS) is for SQQQ to be close to 15 .5and 16.5?  just getting the targets right in my head


  28. Phil, if I wanted to add some futures shorts to get more neutral (not just a day trade), what would be your preferred index?


  29. Turns out TD will let us choose the MJ ETF so it's back in for the Money Talk Portfolio!   MU is out (no time).

    SQQQ/Batman – Well, SQQQ is now $14.77 and it's a 3x ETF so if the Nas falls 10%, SQQQ goes up 30% to $19.20 so that's about where we'll be at 6,400.

    Wow, uglier and uglier on the indexes.  

    Futures/Palotay – Well I'd go back to this morning and take those /YM 25,300 shorts I suggested – they are up about $3,000 per contract now!  As I said, the Nas below 6,912 has a clear ride to 6,400 and that's $10,000 per contract with a very clear, very cheap stop line so that's what I'd use but I don't like using Futures for hedges – they are better as quick in and out adjustments.  


  30. Anyone able to get a fill on that SQQQ spread for the OOP? Can't get a Phil : ) on a $1.60 spread. Don't want to sell my current long calls (which are waaaay up) without having this new hedge in place!!!


  31. tsla


  32. abx?


  33. nice jump for WHR (so far) AH


  34. jabs / ABX reports at 5 according to Earnings Whispers


  35. thx soma!


  36. F beat.. up 2% AH.  Hopefully, we will see a rotation out of Momentum winners into Value. MSFT beat as expected guidance will be discussed on the call. 


  37. Phil – why is MT taking such a beating?


  38. my prediction for the year came true today:

    1) The markets will be lower at the end of the year than on Jan 1, and

    2) Volatility will be higher

    I see this continuing on into December. Then it'll be time to predict 2019.


  39. nasdaq – I think you might be looking for 5800 now


  40. Cash is probably the best hedge and now is a good time to refresh our knowledge of all things hedges. 

    A few posts I saved to my personal archive (I have a lot more but time flew by today):

    The Stock Market Parachute: a 2007 diamond :)

    DXD hedges

    In the distant past, each days posts used to have 'tags' – I never really used them and forget about them. At some point, the use of 'tags' was dropped. But for finding out the gems on hedging from yesteryear (and the basics and nuances of hedging haven't really changed over time) you could try these two searches:

    Posts tagged Hedging Strategies

    Posts tagged Hedging

    Of course, having written this, Sod's Law the markets should rebound pretty significantly tomorrow!


  41. SQQQ/Soma – Was a moving target but fills between $4.20 and $4.40 on the OOP play for the $12s (last was $4.56) and then the $18s just closed at $2.68 with lots of trades at $2.60 so $1.80 should be the worst case.  In a case like that, when it's heading higher, try to buy 10 longs then sell 10 shorts then 10 longs and 10 shorts…  that way, you can't get too burned on any set and, if all goes well, you can get very good prices.

    TSLA up 12% claiming a $312M profit for Q3 and saying Model 3 has gross margins over 20% but that was at $54,000 so now at $45,000 – is there any profit.  Musk is very good at keeping the targets moving faster than you can follow.  

    Tesla says it delivered 56,065 Model 3s and 27,710 other models to customers in Q3. And its solar business is up, the company says, by 7 percent this quarter and 26 percent year over year.

     

    Tesla blew past analysts’ expectations for quarterly earnings and revenue while reporting its first profit in two years.

    The electric car-maker reported adjusted earnings of $2.90 per share on revenue of $6.82 billion, exceeding average analyst expectations of losses of 15 cents per share on revenue of $6.32 billion.

    Free cash flow came in at $881 million, buoyed by operating cash flow of $1.4 billion, the company reported. Operating income registered at $417 million, with an operating margin of 6.1%. Tesla reaffirmed expectations of continued GAAP net income and free cash flow in the fourth quarter.

    All in all not bad but will take time to see if the numbers were fudged.  I wouldn't short them…

    WHR/Coulter – About friggin' time!  

    F was good too.

    MT/Coulter – Other steel makers were not so good and tariffs and this:

    ArcelorMittal declares force majeure for Duisburg-Ruhrort site

    Earnings not until 11/1.

    Nas/BDC – I certainly hope not!  

    /RB testing $1.80, that's a DD on the 1 at $1.82 I picked up in the Webinar.  

    Indexes spiked up a bit into the Futures close.  

    Hedges/Winston – Brilliant stuff!  cool  You should put that book together for me.  Wiley wants me to publish something and I can never get motivated as I've written it all before and it feels redundant but you know where all that crap is!  


  42. Winston & Phil – you want a copy editor, give me a yell.


  43. Phil – I may not agree with you always, and I can be a PIA sometimes, but the primary reason I stick around here is a pursuit of learning – and that is a lifelong commitment to keeping the grey matter active and engaged. 


  44. snow – good to hear from you. Had the chance to do business in South Korea a few years back. One hell of an impressive place.


  45. Well, if we could somehow take all these years of stuff and turn that into a cohesive-looking book on options trading, then I don't mind writing updated versions of things – it's starting from scratch I don't have the patience for. 


  46. Thanks, Winston – I'm into the final year of my contract here at DGIST, spending 8 months/year here (fall & spring semesters). I'll likely call it a day and settle into Altadena for a time next summer, but it's been fun and educational. Pres. Moon is a very adroit diplomat; fascinating to watch him work.


  47. Phil / SQQQ – target -Thank You,  I misread your BCS on this thought you had a 12 / 15 spread ( which did not make sense if the target was about 18 / 19)  so tried to make the math fit to the spread.   Thankfully only bought the long calls today…. so can sell some short callers tomorrow.


  48. Looks like a good move, Futures are weakening already.  


  49. UPS profit gain overshadowed by trade war worries, shares fall



  50. Why Are Stocks Going Down?


  51. Nasdaq Plunges Most Since 2011, Enters Correction











  52. /Phil/Tsla- with the quarterly results out, what would be the thoughts on the 420-450 bear put spread we hold? During last review, you were comfortable that 420 by Jan 19 was unlikely. After today's ah move, Are you still comfortable or should we lock in the profits?


  53. $315 or $320 is still a long way from $420 but we'll see what the options are pricing tomorrow.


  54. Phil- thanks. 


  55. Any opinion on ABX earnings???


  56. TSLA…and another one of the most successful low profile innovators announces an initiative to develop an electric car with solid-state batteries.

    https://www.nbcnews.com/business/autos/tesla-s-latest-challenger-dyson-best-known-its-vacuum-cleaners-n923411


  57. Good morning! 

    Nice turnaround on /RB but I'm not liking how weak the indexes look despite very good TSLA, TWTR action.  Quick profit if $1.825 fails to hold (or $67 on /CL).