Tuesday, October 08, 2019

Weekender 10/6

1. Market Summary

Excerpted from Thursday's paid content of "Investment House Daily" by Jon Johnson.

Stocks Plunge Post Poor Manufacturing Report

- There was a soft start and then a plunge on the ISM Services led to a 200-day SMA (simple moving average) and a rebound.
- It is nice to see the market act as it should, i.e. without the Fed. At least we think without the Fed...
- ISM Services holds above 50, but misses expectations. Factory Orders and durables as expected but somewhat week and capital spending has dropped by 0.4%.
- Rebound internals are weak, suggesting a relief move. However, we can still make some money on the upside.
- We are swinging for singles and doubles on a bounce, not home runs.
- Will the Fed let the market work its cycle or will it mess things up again?
- We are playing the bounce in anticipation of more downside to come.

The session played out pretty much as expected, even though it took a rattling by a weaker than expected ISM Services to get the indices down to test that 200-day SMA. After that, an oversold bounce and a short covering rally ahead of the September jobs report soon ensued.

The rebound moved the indices from modestly lower to sharply lower with the Dow off 357 points on the low and undercutting the 200-day SMA. The NASDAQ found the 200-day SMA as well, dropping 185 points on the low.

That selling was enough for the market to get sufficiently oversold in the 2.5 session drop (that actually started during the prior week) to rebound. The jobs report was released before the markets opened on Friday, and as jobs tend to lag, there is the possibility that the report can provide no signal that the economy is slowing. It won’t be an accurate economic signal, but right now, the markets live in fantasy land and imbue data with certain meanings that they do not really have.

Index Discussion: Look at the S&P500, DJ30, NASDAQ and the XLK. They all failed to put in higher highs during the last rally, unlike the prior move. The S&P 500 put in a higher high from April to May and then again in July. However, it failed to do so in September and rolled over. The trajectory of the NASDAQ is even clearer.

The PHLX Semiconductor Sector (SOX) is the outlier, and it is important as it put in an intraday new high, reversed and tried to put in a higher low. Its uptrend is still intact even though it certainly looks as if it is setting up that same upward pointing wedge that the other indices broke down from. NOTE: The figures and information above are from the 10/3 report.

Watch Market Overview Video

Watch Next Session Video

NOTE: The videos are from the 10/2 report.

2. Targets Hit
With the market primed to sell, if the Fed will quit buying bonds and let it, most of the action was on the downside. We took some gain on Wednesday and again on early Thursday due to the selling as we anticipating an oversold bounce once the NASDAQ and DJ30 hit the 200-day SMA. It paid off.

Here are three completed trades from Investment House Daily, which offer insights into our trading strategy and the targets that we have hit this week:

Health Insurance Innovations Inc. (NASDAQ:HIIQ): There was an opportunity to make money even during the selling. HIIQ is a stock that set up a big triangle with a double bottom from August to early September. It broke higher, moving through the 50-day estimated moving average (EMA) and then tested the upper trend-line in the triangle. Then, it faded to the 50-day EMA inside the triangle and showed a doji. We really like that kind of entry, i.e. the higher low at a key support level in a triangle or trading range as that usually leads to a breakout.

So, when HIIQ gapped to the upside through the trend-line during the next session, we entered with some stock at $23.85 and some November $25.00 call options for $2.80. HIIQ paused the next session, which is not uncommon after a gap, and then started to rally. It even walked right up to near the 200-day SMA and was showing a doji in the last hour of trading. We opted to sell half the position. That is, we sold some stock for $26.02 and banked a 9% gain. We sold half the options for $3.60 and banked a 27%. While this is not huge, it was solid for a week in the stock.

Pinterest Inc. (NYSE:PINS): During the prior week, we took a nice 75% gain on half of our put options. Since PINS was selling hard, we left the other half to see if it dropped on down to that May low. It started heading that way Monday and then it reversed to flat. Dang. While the stock held its ground on Tuesday, on Wednesday, it gapped lower and sold. However, it also started to hold and climb. We then sold the rest of the options for $3.55 (bought at $2.00) and banked a a solid 77.5% gain.

Starbucks Inc. (NASDAQ:SBUX): We put SBUX on the report on 9/21 as it had broken the 50-day MA after a weak test of the July high failed. It sold through the 50-day MA and then worked laterally into the third week of September. It looked ready to move lower and continued sideways. This meant that it was literally up one day and down the next as the mood regarding the U.S.-China trade dispute changed each session. Finally, it made a meaningful break lower on 9/27 and we moved in with some November $90.00 put options for $4.45.

As is often the case, when a downside play finally makes its move, it makes it fast. SBUX had dived lower on the prior Friday, paused with a continuation doji on Monday and then moved towards the downside. On Wednesday, it was close to the target and when it broke lower on Friday, it hit the target. We sold the options for $7.40 and a 66% gain. Now, we plan let it bounce up to the 10-day EMA and play it towards the downside again as there is a lot of downside room to sell.

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3. Pick of the Week

URBN (Urban Outfitters--$27.49; -0.68; optionable): Apparel stores

EARNINGS: 11/19/2019

STATUS: URBN is one of those lagging retailers that just recently started coming off the lows. Firstly, it formed an inverted head and shoulders in August at the bottom of the base and broke higher through mid-September. It then broke over the 200-day SMA Monday with some strong volume. Now that it has cleared that resistance, there is some maneuvering room as the market makes its relief bounce. On Wednesday, URBN tested the 200-day SMA on lighter trade. We want to play the move back up through our buy point. A move to the target will give us a gain of around 14% on the stock and a gain of 90% on the options.

VOLUME: 2.907M Avg Volume: 3.535M

BUY POINT: $27.61 Volume=4M Target=$31.49 Stop=$26.39

POSITION: URBN NOV 15 2019 27.00C - (51 delta) &/or Stock

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4. Covered Call Options Play

Lattice Semiconductor Corp.(NASDAQ:LSCC) -- Lattice Semiconductor Corp. is currently trading at $18.70. The November 16 $17.50 Calls (LSCC20191116C00017500) are trading at $2.30. That provides a return of about 13% if LSCC is above $17.50 by the expiration.

Learn more about our Covered Call Tables here!

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