Caution Warranted For Bulls In Options Market This Week
Last Thursday was a decent way to end a shortened and red week for the broader markets.
However, markets have had two consecutive red weekly candles in a row. On the upside, the small caps bucked the trend and closed the week green. In fact, all week they had a bullish setup and led upwards. Alas for the bulls, the broader indices never joined the fight.
Look Back On Last Trading Day
Thursday, the small caps finally stepped back from the leadership role and closed slightly lower than the Dow and S&P. After reading the recap below, it will become clear that caution is warranted for bulls. Portfolios that are predominantly long need some balance or defensive plays.
This can be done via the VIX calls (VOLATILITY S&P 500 (INDEX: VIX)), buying puts in indices or stocks or even with inverse ETFs that are leveraged. Defense money spent most often is "wasted" money, but that’s precisely the point. As with insurance, policies are purchased in order to combat the unforeseeable. Simply because the likelihood of actually needing home insurance is minimal, foregoing a policy is daft. Insurance is in place to protect assets in case the unthinkable actually occurs.
Similarly, defensive financial moves are in place to protect financial assets. Just as insurance cannot be purchased following a disaster, defensive financial plays are put into action from the onset. While the premium costs may end up being "wasted," proceeding without protection will end up costing astronomically more.
Thu: DOW: +.37%, SPX: +.35%, NDX: +.11% , RUT (small caps): +.32%
The small caps not leading marks a change from recent action. Monday preopen levels were scary for bulls, but the open quickly went green. Yet, small caps are still lagging. Investors should be cautious of chasing aggressively. The ranges are still set up to mirror those of last week. Markets will need positive catalysts to run far. Good news from Greece could do it.
Recent rallies have mostly been relief pops based on the elimination of bad news; eventually, new bullish fundamentals will need to emerge on which to rally. Earnings season is here, but consensus is that the numbers won't be good enough to fuel a rally. Furthermore, companies are likely to be cautious in their forward guidance; thus, the proclivity to lean in favor of the bear trade. One such option would be to use credit spreads on particularly strong days that have no fundamental backing. There are exceptions to the rules, but during earnings season, it often proves beneficial to trade the indices.
The reason for today's run is attributed to bad economic news (bad NFP report) ultimately being good news for equity prices. There is a good chance that this is misplaced belief, as the Fed seems determined to raise rates in 2015 regardless of whether data suggests otherwise.
(Before Friday morning NFP action)
PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ: QQQ): Doji candle 4/2 expressing indecision. Dangerous to do at support.
In fact, this marks the junction of 2 support nodes. Needs to hold 105. This is crucial to the trend. Bulls need to shrug the potentially bad Monday open.
iShares Russell 2000 Index (ETF) (NYSE: IWM): Still holding best and closest to all time highs. Ascending channel intact (yellow).
iShares Dow Jones Transport. Avg. (ETF) (NYSE: IYT) is the chart to watch that can forecast the general market direction. IYT is teetering at the edge of disaster. This will likely cause a problem for the main market indices. 4/2 candle was terrible, especially after being green early. Furthermore, a rally could be expected in IYT on prospects of low oil. Unfortunately, the opposite happened, which is not a good sign.
Blackstone Group LP (NYSE: BX) seems to be topping out at its current level. It has done this before at around the 34 level, but then it broke out. Therefore, doing covered calls is perfect while it decides. 38.5 could cause a small drop. 36 could invite many more sellers as the rise from 33 was too fast. 33/34 appears to be a well-consolidated level.
On the previous day, Starbucks Corporation (NASDAQ: SBUX) broke first line of support.
Today, it bounced trying to recover the yellow line. The battle continues. If it weren't for earnings, a credit put spread might be appropriate.
Tesoro Corporation (NYSE: TSO) is showing possible head-shoulder, which is bearish. This on the back of a terrible day for refiners. There could be much more red to come. So, booking profits or protecting longs would be appropriate.
Market Vector Russia ETF Trust (NYSE: RSX) looks like a break-out candle today from the descending green trend. However, the trend is still hazy and thus an area of contention. Shorting might not prove to be prudent, and riding a breakout will necessitate confirmation.
With 15 minutes left in Thursday’s session, Apple Inc. (NASDAQ: AAPL) extended a spike that came out of nowhere, which took the S&P and Nasdaq past their breakout levels.
Check out the video below for a full recap of this week's outlook:
Image Credit: Public Domain
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