Markets and Market Internals
The broader markets have been in a choppy consolidation for what seems like it will go on endlessly. There have been failures to move higher and lower, but there are some sectors that have been in decisive trends. Market internals are neutral, but one has moved to a bullish level.
This environment has been a more difficult one, but that should be coming to an end soon. Let’s review the broader markets, sectors, and some stocks of interest now.
The four charts above are a good representation of the broader markets and, of course, what they are meant to be. The reason I mention it that way is the diverse differences between them, rather than the typical of most markets moving in the same direction together.
The upper left chart of the Transports ETF (IYT) has made a higher high and is above all of its major moving averages. The upper right chart of the S&P 500 ETF (SPY) broke below the support it was creating; however, it has not been able to follow-through lower. That has created a new price support level in the $212.00 area and resistance above the $217.00 area.
The lower left of the Russell 2000 ETF (IWM) made a new high, but then gapped lower. This price pattern was short-term bearish, but has not followed through. This trend is still up, but in question.
The lower right of the Nasdaq 100 ETF (QQQ) made a new high and did pullback from that new high as well. However, that pullback held at prior resistance and has moved sideways. This is the most bullish pattern of the four and strongly suggests a move above the current consolidation.
Broader Markets, Sector Trends and Internals
Of the multiple time frames monitored in the matrix above, there are only two with all time frames aligned. The Semiconductors (SMH) are up and the Utilities (XLU) are down. That being said, there are several with the weekly and daily times frames UP, and none down.
Overall, we have a mixed market. You know that, which the table confirms and more importantly shows where big money has been moving into or moving out of.
The market internals are not giving a clear signal and has not for quite a time now. Breadth did move to a mildly bullish level from last week because of the selloff. That is a plus, but without sentiment aligned with breadth, it is not a buy signal based on internals.
Markets can trend in a direction with internals like we have. Reversal signals come when breadth and sentiment are aligned. Historically, that happens when the markets are moving lower — but can in a sideways period.
The September – October period is the most bearish time of year. There is time left for the bears, but it is running out as the most bullish time of year follows next month.
Stocks and Charts Setting Up
The stocks I am focused on are primarily those that have bottomed, turning higher or have already. At this time, most are not giving clear setups for entry, which makes sense with mixed markets and internals.
Morgan Stanley (MS) bottomed earlier this year. After a powerful move from its bottom, it began a consolidation of that move, which was bullish. Within that consolidation there was a breakdown, but there was an immediate recovery and new high. Friday’s Bottoming Tail (BT) does signal a move higher if prices clear Thursday’s high.
Several financials report earnings on Friday. MS is the following week.
Macy’s (M) is still forming its bottom on the weekly time frame (right chart), but the daily has turned back up and cleared the 200-day moving average on Friday. This is one that doesn’t have a clear entry, but the charts point to higher prices.
Apple (AAPL), if it can clear the recent resistance (blue line), I expect the $120.00 area and possibly higher to follow. A $2.00 stop-loss will be more than enough.
GoPro (GPRO) has a clear weekly bottom in place and above its 50 –and 200-MAs. It has had a difficult few days at the end of last week, which of course happens in an uptrend. No clear entry yet for the equity, but we have recommended a Nov bull put spread, which is still an open position.
Western Digital (WDC) has a clear bottom and uptrend on the weekly and daily time frames. The weekly has had several weeks up, and a red candle formed last week suggesting a move to Minor Support (mS). We will look to post an official option trade at that time.
Juniper Network (JNPR) has been bottoming and it cleared price resistance and the 200-day moving average last week. Ideally, there are a few more days of consolidation, but above Friday’s high has to be considered.
As mentioned, there are mixed markets and market internals. This doesn’t make for an environment that provides clear entries. There have been many false moves higher and lower, but based on time year that should come to an end soon.
Wealth Building Option Trades
Please see M chart above.
Trade: We recommend selling 10 Nov $34 puts and buying 10 Nov 30 puts (i.e., a bull put spread) at its closing mid-point price of $.52/share or better. Note that earnings are 11/9 (holding over earnings higher risk).
Strategy: Breakout daily and weekly.
Max Gain: Credit received of $520 which is realized if the stock closes above the short $34 strike by expiration.
Max Loss: $3,480 if closed under long strike price of $30 (but our loss will not be near this amount based on our stop loss).
Breakeven: $33.48 (short strike price less premium received).
Stop Loss: $34.88
Adjustments and Comments on Open Wealth Building Trades
GPRO – Short the Nov $14/10 bull put spread on GoPro Inc. for $.76/share. No adjustments currently needed. Note that earnings are 10/27 (holding over earnings higher risk).
PTCT – Short the Oct $10 puts at $.25/share. No adjustments currently needed.
Income Option Trades
Please see QQQ chart above.
Trade: Over $119.25, we recommend buying 10 Nov $117 calls (currently offered at $3.37/share).
Strategy: Breakout on daily and weekly, and monthly still in uptrend. Should not trigger unless market turns clearly bullish.
Stop Loss: $117.68.
Please see MS chart above.
Trade: We recommend selling 10 Nov $30 puts and buying 10 Nov 26 puts (i.e., a bull put spread) over $32.75 (closed with mid-point of $.44/share).
Strategy: Breakout daily and weekly.
Max Gain: Credit received (around $360) which is realized if the stock closes above the short $40 strike by expiration.
Max Loss: $3,640 if closed under long strike price of $26 (but our loss will not be near this amount based on our stop loss).
Breakeven: $29.64 (short strike price less premium received).
Stop Loss: $30.58
Adjustments and Comments on Open Income Trades
WMT – We were short 10 weekly (10/7) $70.5 puts at $.32/share and stopped out at $.63/share for a $$310 loss.
As always, be selective and patient. We will be monitoring these and other stock and option trade ideas and post them when more clear.
Happy trading! If you have any questions or comments, please e-mail Greg Capra at Greg@gregcapra.com or Dan Gibby at Dan@gregcapra.com
All the best,
Greg Capra
Founder of The Pristine Method of Trading
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