We will do our normal weekend review of the market’s action last week and outline our Master Trader plan for this week.
However, if you did not read Friday’s letter, please read it here after today’s letter.
The short overview of it is that we’re expecting some more upside in the market (no surprise), but there are warning signs that cannot be ignored. That being said, it’s worth a minute or two to read it. I think you will gain a few valuable insights.
DOW JONES INDUSTRIALS
Above is the daily chart of the Dow Jones Industrials. It has pulled back to the intra-day support and unfilled gap shown in last Monday’s letter. The anticipated move up written about in Friday morning’s letter started. The start was not impressive to say the least, and we’ll see how far it gets.
With breadth as oversold as it is (see Friday’s letter) the fuel is there to make it to and above the recent high. If it does, the media will again tout the all-time highs (they have to), which is likely to silence all but the most stubborn bears that have been in denial of the rally from its start.
A move above that recent high would establish a new reference point of Major Support (MS). As of now, the major support level below would have to be violated to break this uptrend. However, a correction to that point would be bearish because of the depth of the retracement.
Master Trader Tip: The areas marked as intra-day support level are not MS because they are not swing pivot lows.
BROADER MARKETS
The Transportation index (upper left) and Russell 2000 index (lower left) have violated their uptrends in the daily time frame shown. The weekly time frames are both still in uptrends, but that would change if prices broke below the second green line respectively.
The S&P 500 ETF symbol SPY (upper right) and the Nasdaq 100 ETF symbol QQQ (lower right) are clearly showing relative strength to the other broader market ETFs. SPY and QQQ both corrected to fill their respective gaps below (support) and to their rising 20-period moving averages.
The Nasdaq 100 has been the strongest and for that reason should see a new all-time high this week. Assuming that happens, Thursday’s low will then become new Major Support. Considering that MS would be very close to the prior MS, a break of that low would be a very significant one.
We will review various trend structures during our monthly review and other concepts.
TREND MATRIX
Above is our Sector Matrix. The way to utilize this Matrix is to view which sectors are in the same trends in the weekly and daily time frame. With that alignment, when the hourly is in a sideways trend or downtrend, we look for entry points in alignment with those trends in the higher time frame.
When there is a misalignment — or what might show as an up-down-up of the time frames, odds are that you should just stay away. The highest odds are always going to be when there is an alignment of multiple time frames. Counter-trend traders can consider those types of setups when the hourly turns against the higher.
While many sectors are in an uptrend on the weekly and daily time frames, others have changed from up to sideways on the daily or from sideways to down. Semiconductors continue to do well and we have some to recommend for trades.
MARKET INTERNALS
With the recent minor correction in the broader markets the breadth gauge moved to a bullish level. Again, read Friday’s letter for an in-depth view of this. Many stocks are being sold aggressively and falling hard, which the broader market indices are masking.
This is not uncommon before a break in the broader markets. The market internals we use will always reveal that weakness before it is obvious to the majorities. They will be focus on “the markets” or stocks that have been the strongest, which will typically break last – if they do.
Sentiment remains neutral, rather than a move to bullish, even after last week pullback. A move to a bullish level after a pullback would be the norm because sentiment is a contrarian internal gauge.
That fact that it has not isn’t that surprising after the steady advance that began on the election results. In other words, traders have become overly confident in the advance or even complacent about risk.
The monetary market internal gauge remains bullish and that will not change anytime soon.
NEW TRADE IDEAS AND TRADE UPDATES
Below is daily chart of PowerShares QQQ ETF (QQQ), $131.39.
Trade: Over $131.60, we recommend buying 10 Mar $129 calls (5 DTE) (note: do not pay over 2-3 cents for time value). Note: As long as QQQ stays above its Intrinsic Value after entry, you can only lose the immaterial time value paid, making it a superior option trade versus stock.
Technical Setup: Breakup daily with strong uptrend on weekly and monthly charts.
Option Strategy: Long Calls. Call buyer pays a premium for the right to buy the underlying asset (stock) at a specified price (strike) for a specified period of time (expiry). Long calls are used to capitalize on upside market movements with less cost (leverage) and to limit risk (to debit paid). One (1) contract represents the right to buy 100 Shares. Potential Gain is unlimited; Max Loss is Premium paid. Break-even point is Strike Price plus the Premium paid.
Target: We are not sure but looks poised for breakout. For risk management, because of the mixed internals, just trail stop under a prior day’s low and/or sell into any accelerated move higher.
Stop Loss: $130.78.
Below is daily chart of Cheetah Mobile Inc. (CMCM), $11.54.
Trade: We recommend buying 1,000 shares of stock around $11 on a pull back since it is extended.
Technical Setup: Bullish Wide Range Bar (+WRB) breakout on the daily and weekly charts.
Target: $13.00.
Stop Loss: $9.78.
Below is a daily chart of VanEck Vectors Semiconductor ETF (SMH), $77.93.
Trade: We recommend selling 10 Apr $75/70 bull put spread (38 Days to Expiration (DTE)) for $.57/share (closing mid-point) or better.
Technical Setup: Breakout daily and weekly, with uptrend monthly chart.
Option Strategy: Bull Put Credit Spread. Defined risk strategy where you make maximum profit (net credit received) if the stock closes above the short put strike at expiration. We sell put strike price below support where the pattern suggests that the stock will not close under at expiry, and simultaneously purchase lower strike put than the one sold as a hedge and to reduce margin.
The return on investment (ROI) is the credit received divided by the maximum loss (i.e., width of strike prices less premium received). The break even is the higher strike price less credit received (i.e., also your cost basis if assigned the stock).
Considered a mildly bullish strategy since we are not buying calls or stock and just calling a short-term bottom in the pattern. Trade has positive theta (meaning you make money on time decay) making it a high probability trade since we time with the technical pattern.
Stop Loss: $75.48.
Note: Other bullish semiconductors to watch include TER, LRCX, and XLNX.
Below is a daily chart of j2 Global, Inc. (JCOM), $84.83.
Trade: We recommend selling 10 Apr $80/75 bull put spread (38 DTE) for $.70/share (closing mid-point) or better.
Technical Setup: Breakout daily, with uptrend weekly and monthly charts.
Option Strategy: Bull Put Credit Spread.
Stop Loss: $80.88.
Adjustments and Comments on Open Advisory Letter Trades
JWN – Sold 10 Mar $42.5/37.5 bull put spread for $230. Mid-point to close is $.16/share so move stop break even.
TLT – Sold 5-lot Apr $123/128 bear call spread for $.57/share and 5-lot for $.53/share for average of $.55/share. Nice gap down, move stop loss $119.52 to protect gains.
ROST – Sold 10 Apr $70/75 bear call spread for $550. Stop Loss: $69.62.
FXA – Sold 5 (half lot) Apr $77/79 bear call spread for $.40/share and 5-lot for $.36/share for average basis of $.38/share. Mid-point to close is $.23/share. Bid $.05/share to close as looks lower, move stop loss $75.72.
BA – Trade #1: Sold 10 Mar $187.5/195 bear call spread for $.86/share. Mid-point to close is $.12/share so let’s close for $.14/share to book $720. Trade #2: Sold 10 Apr $195/210 bear call spread for $.98/share. Mid-point to close is $.38/share so close half for $.60/share and move stop break even for back half.
VIAB – Sold 10 Apr $45/47.5 bear call spread $.43/share. Stop Loss: $45.12.
AI – Shorted 1,000 shares of the stock at $14.43. Trail stop over prior day’s high to book gains.
EEM – Sold 10 Apr $39/40.5 bear call spread for $.36/share. Move stop loss $38.52.
NFLX – Trade #1: Sold 10 Mar $145/152.5 bear call spread for $.65/share. Mid-point to close is $.43/share so move stop break even. Trade #2: Sold 10 Apr $150/170 bear call spread for $2.90/share. Mid-point to close is $2.51/share so move stop break even.
XON – Sold 10 Apr $20/18 bull put spread for $350. Acting fine but spreads widened, bid $.15/share to close. Stop Loss: $19.88.
HTZ – Sold 20 Apr $20/17.5 bull put spread for $600. Mid-point to close is $.40/share so move stop break even.
KBH – Purchased 10 Jul $15 calls (136 DTE) and sold the Apr 19 calls (45 DTE) for a net debit of $2.95/share. Note: Holding over earnings (4/12) is higher risk. Stop Loss: $15.88.
UA – Bought 10 Apr $22.5 puts for $4.25/share. Sold Mar $17.5 puts for .25/share to convert to Bear Diagonal and lower cost basis to $4.00/share. Move stop loss $18.42 (which will still be small profit because of put sold).
UAL – Trade #1: Sold 10 Apr (weekly 4/13) $79/82.5 bear call spread for $530. Mid-point to close is $.36/share so move stop break even. Trade #2: Sold 10 Mar $77/80 bear call spread for $270. Mid-point to close is $.09/share. Looks lower so bid $.05/share to close and move stop break even.
GPI – Sold 10 Apr $85/90 bear call spread $.47/share. Stop Loss: $83.22.
CSX – Sold 10 Apr $50/55 bear call spread for $.88/share. Note: Close before 4/18 earnings. Stop Loss: $50.32.
NMM – Purchased 2,000 shares of stock at $2.25. Nice move, move stop loss $2.08.
WFT – Sold 10 Apr $6 naked puts spread for $.19/share. Stop Loss: None for now since bullish long term.
PNC – Sold10 Apr $135/140 bear call spread for $500). Note: Close before 4/18 earnings. Stop Loss: $132.22.
ATU – We recommend buying 1,000 shares of stock around $28.80 on a slight pull back. Target: $29.50 – 30.00 for swing trade. Note: Close before 3/ earnings. Stop Loss: $26.28.
You can sign up for the Master Trader Monthly Advisory here. Those that have been receiving the Advisory Letters and Intra-Day Update still will through the 14th. Our comprehensive Master Trader All-Inclusive Advisory Market Edge Membership includes the Advisory Letter — plus much more – in providing ongoing, invaluable trading information for active investors and traders. Check out what the amazing package includes. It is far more that the Letter, which provides market guidance and primarily trading opportunities. We will be holding our first group meeting soon to review the markets, trades, and trading techniques. Stay tuned!
Happy trading! If you have any questions or comments, please e-mail Greg Capra at Greg@mastertrader.com or Dan Gibby at Dan@mastertrader.com
All the best,
Greg Capra
Managing Director and Pristine Founder
Dan Gibby
Chief Options Strategist
Follow Greg on Twitter and StockTwits to get real-time updates:
Twitter: @GregCapra
Stocktwits: Greg_Capra
NOTE: Master Trader will show all trades assuming a 1,000 position for stock, or a 10-lot for options (which represent 1,000 shares of the underlying). However, this is not a recommendation on proper share size for your particular trading style, risk tolerance, or account balance. We urge you to calculate your own share size based on your individualized risk parameters, Trading Plan, and familiarity with the proposed trade.
NOTE: Master Trader and its representatives might have existing positions in these and other trade recommendations before or after suggested herein. Additionally, we often manage them differently for internal purposes based on different risk parameters than noted herein.
