Here’s what to look for in the action today…
General Trends
If you had fallen asleep last Tuesday evening, and then just woke up this morning, you wouldn’t notice anything different about the stock market.
You wouldn’t know the S&P 500 suffered a 43-point drop last Wednesday. You wouldn’t know about the three-day rally since then that has nearly recovered the entire decline.
Everything looks the same as it did last Tuesday. The S&P is roughly in the same spot. Just about all of the technical indicators are back in neutral territory. The Volatility Index (VIX) is back down below 11. VIX option prices are skewed toward a higher VIX over the next few weeks. High-yield bonds and semiconductor stocks are still trending higher.
So, I’m reverting to the same advice I offered last Tuesday…
The S&P 500 is still trading below my 2411 minimum upside target. Most technical indicators have room to run before they reach overbought territory.
So it’s still too early to put on a lot of bearish trades.
But it’s not too early to get defensive. Take some profits off the table. Raise stops on existing positions. Be selective with new long-side trades. And be willing to hold onto your cash.
Stocks
The bulls recaptured the momentum yesterday when the S&P 500 closed solidly above its 9-day exponential moving average (EMA). The VIX also confirmed its “buy” signal when it closed lower yesterday. So, despite a strong urge to be bearish right here, I just can’t recommend aggressive short trades yet.
A nibble or two on the short side makes sense for aggressive traders. The intraday charts of the S&P do show negative divergence on a few technical indicators. That condition usually leads to a brief, one-day pullback.
But in order to set up for the type of decline that lasts several days to a few weeks, we need to see the daily technical indicators (like the McClellan oscillators) stretch into extremely overbought territory. We’re still a long way from having that happen.
We also need to see leading sectors like high-yield bonds (HYG) and semiconductor stocks (SMH) roll over and start to break down.
Until that happens, and until price action starts to weaken, traders are better off staying defensive and sitting on their cash.
Gold and Gold Stocks
Gold stocks popped higher yesterday morning. But the action was disappointing. The VanEck Vectors Gold Miners Fund (GDX), closed positive on the day, though it was well off its high.
Here’s an updated look at the 60-minute chart of GDX…
The gold sector just can’t seem to build any momentum. GDX has been chopping around for the past week. Yesterday’s action formed a lower high on the chart. That increases the likelihood GDX will at least retest last week’s low before making another attempt to push higher.
This is the kind of action that frustrates gold bulls. Traders who buy speculative call options watch their positions get chewed up as GDX chops back and forth with no real direction. Option prices just slowly wither away.
This is, however, an ideal environment in which to sell uncovered put options. You collect the premium. Then you profit if the stock goes up, if it stays the same, and even if it drops a bit.
My Delta Report subscribers have sold uncovered put options on GDX three times in the past four months. The first time, we made 25% in just 21 days. Then we made 16% in 23 days.
The current position is up 10% in about a month.
Meanwhile, GDX is trading at just about the same price today as it was back in January when we first started selling uncovered put options on it.
If you bought the stock, you’re breaking even. If you bought call options on GDX, you’ve lost money as the option prices decayed over time. But, if you’ve been selling uncovered puts, you’ve been profiting well in the choppy environment.
As long as GDX continues to chop around, selling uncovered put options is going to be a money-making strategy.
I’ll update Delta Report readers on these trends throughout the day on Jeff Clark Direct.
Best regards and good trading,
Jeff Clark
Mailbag
If you have a question, comment, or a great trading story in mind, be sure to let me know about it right here.
Today, some great feedback on a few of our recent Delta Report trades…
Your message yesterday on URBN was spot on. When I looked at the chart, I also thought that a lots of bad news was already counted in. What a great find and timing.
– Francois D.
Hi Jeff, I really admire how much you care for your readers, it means a lot. I wouldn't want a trade idea if there was not any basis behind it, you have to take what the market gives you. Thank you for the QCOM idea, I got in at $0.43 and sold four days later at $1.97, awesome. Thanks for caring about us.
– Chris S.
Jeff, Of the 24 trades I have closed out 19 have been winners. Thanks for your patience It is the sort of analysis and control that over time will show a profit and make a now devoted follower, a winner. Taking your time and getting it right is the name of the game.
– Kenneth P.