Fabulous Thursday – Testing our Strong Bounce Lines – Again

October 8, 2020

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Here we are again.

I don't even have to write anything new today, I'll just copy and paste what I said on September 15th, in: "Terrific Tuesday – S&P 3,420 Yet Again":

As we discussed last week (when we failed at 3,420), 3,420 is our Strong Bounce Line and the 20% Line so we knew we were likely to re-test it – the question is whether or not the S&P passes the test and we may find that out this morning as the Futures are pointing up yet another 1% – just like yesterday when we made most of our gains in the thinly-traded pre-market session.

Our 5% Rule™ told us 3,420 would be our Strong Bounce line on the way back up but it was much easier to call a short the first time we tested the line, as we did on the 9th in our Live Member Chat Room, because we had not consolidated for a move higher at the time. Now the markets have had time to digest the bounces and we're above on all the indexes but the S&P 500 as back on the 9th it was:

Another chance to short at 3,420 on /ES with tight stops above. Lined up with 28,200, 11,475 and 1,540.

That is NOT the case this morning with Dow 28,320, Nasdaq 11,532 and Russell way up at 1,617. ONLY the S&P 500 hasn't confirmed the move over the strong bounce line so it's no longer wise to bet against that happening. You have to take these moves in context – looking at a single chart doesn't tell you enough. And we're making this move WITHOUT stimulus and WITH Donald Trump likely to be out of office in January – so this is a strong move so far.

The Russell's 1,600 line only just turned green yesterday and the NYSE is at 13,100 this morning but, if it goes green too on the Must Hold line, the other indexes are going to have a much easier time making another run back to the top of the range – a range the Nasdaq left behind 1,600 points ago – back in June. So, as I said in yesterday's Webinar: This is not a time to GUESS what will happen, this is a time to WATCH what happens and then we can make some intelligent adjustments to our portfolios.

We already think we are bearish enough with our hedges so we'll just have to see how things shake out back at our Strong Bounce Lines and it's Thursday – so we're not looking to do anything crazy into the weekend anyway.

Stimulus talks are still up in the air with the Airline Industry hanging by a thread. Yesterday, the Democrats tried to extend the previous aid to the airlines through March but Republicans blocked it – because then it wouldn't have been seen as coming from the President himself, so 38,000 more workers are furloughed through inaction.

As we can see, the XAL Airline Index is about to run into serious resistance at it's own strong bounce line, which is also the rapidly declining 200-day moving average. XAL feel from about $115 to $35 and that's 80 points so a weak bounce is 16 points (20% of the drop) and a strong bounce is 32 points so 51 and 67 would be the key lines to watch and you can see the consolidation happened at 51 (very violent) so now it's likely we'll test 67 and we're only at $58.22.

So, if you believe in Donald Trump, who said he wanted to help the airlines, this would be a no-brainer of a bet as the Strong Bounce line is over the 200 dma and the 5% Rule™ beats TA so the move over the 200-day moving average will be interpreted as bullish on the chart and we should get a nice kick higher once they work out some kind of stimulus for the airlines.

JETS is the US Global Jets ETF and it's got LUV, DAL, UAL, AAL, ALGT, CJT, AC, ALK, JBLU and ATSG as it's top holdings. As we discussed in the Webinar yesterday, we're about a year away from herd immunity, vaccine or no vaccine and the airline industry is vital to our national security and JETS includes cargo carriers, who are actually doing OK at the moment, with all the shipping we're doing.

So that makes a 2023 spread on JETS kind of interesting with Trump promising to save the airlines and the Democrats trying to save the airlines. Eventually, hopefully, SOMEONE will actually save the airlines. For a trade in our Future is Now Portfolo, I'd go for:

Sell 10 JETS 2023 $15 puts for $4.40 ($4,400)
Buy 15 JETS 2023 $15 calls for $6.50 ($9,750)
Sell 15 JETS 2023 $25 calls for $3.65 ($5,475)

That's a net $125 credit on the $15,000 spread so, if all goes well, it will make $15,125 (12,100%) if JETS is back over $25 in 2023. Worst case is owning 1,000 shares at $15 (less the $125 credit) and we can always sell calls to lower that risk if we lose confidence but it's a nice, optimistic bet on things getting back to normal – one day. Ordinary margin requirements on ETFs are pretty low, just $841 for this one so it's a very margin-efficient trade as well!