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$5,000 Thursday – Cashing in Our Shorts and Looking for the Bounce Lines

Wheeeee!  

I love a good correction, especially when we call it.  Yesterday, in the Morning Report (which you could have in your hands every day, pre-market for just $3/day), when the Futures were UP, I said:

We also have a potential 1,000-point drop in the Dow (/YM) to look forward to if it fails at 26,250 so yes to Futures shorts below that line if it fails, with tight stops above.  If the S&P is below 2,860 and the NYSE is still below 13,000 and the Nasdaq fails 7,275 and the Russell is below 1,620 – that's going to confirm a bearish market and we'll get more aggressive on our shorts but, so far, we're pretty well-balanced in our 5 Member Portfolios and we will review them today in our Live Trading Webinar.

The Dow (/YM) Futures did indeed bottom out this morning at 25,174, past our 1,000-point goal and this morning, in our Live Member Chat Room (which you can also subscribe to) I sent out a Trading Alert to our Members at 7:49 saying:

I think 2,750 on /ES is the best long line with tight stops below and 6,780 on /NQ should be fun if dip buyers come in with a stop below 6,775 (Nasdaq loves those 25-point lines) and then we'll watch the rest of our bounce lines to see if we're going to add more hedges or take profits on the ones we have.  

Things are already off to a good start with the S&P flying back up to test the 2,800 line and S&P (/ES) Futures contracts pay $50 per point so a 50-point move would be good for gains of $2,500 per contract on the bounce but, now that we're testing 2,785, we need to keep a stop at 2,780 and settle for a $1,500 per contract gain if the market is simply weakly bouncing pre-market.

I don't usually do this but I put a lot of work into the morning Alert for our Members and there's nothing more important this morning than discussing the bounce lines so I'm going to give you cheapskate readers the opportunity to see just a small part of what we do in our Live Member Chat Room – this PSW Report is essentially just my pre-market commentary for our Members – the real meat and potatoes is what we do in the Live Chat Room all day long:

 

October 11th, 2018 at 7:49 am | (Unlocked) | Permalink 

Alert to all sent at October 11, 2018 – 7:49am

 

 

Good morning! 

Well, we got our 1,000 points so now what?   When I called that yesterday morning I didn't think it would happen within 24 hours so it's a bit disturbing and now we have to consider whether or not this is going to be a good place to deploy some cash.  

/YG is up $600 per contract from yesterday's Webinar call so that's good enough on those and it's very disturbing that this sell-off is coming along side a 1% Dollar drop as it means the markets are even weaker than they look:

Still getting killed on the /RB shorts but I have 8 long now at $2.0001875 (missed it by that much…) and still down about $1,000 per contract, which is 2.5 cents on /RB and I think we can take that back if EIA isn't as tragic as API and I THINK API was reflecting last week's terrible EIA number – so it's behind the curve and I still think the hurricane will shut refinery production and also cause less oil to be imported through the gulf this week – but we won't see the result until next week's inventories.

Overnight the Dow tested 25,174, which is a bit above the 200-day moving average which had better be strong-bouncy or we're heading much lower!  This was a long-overdue correction and will be good and healthy if the 200 dmas hold up but RUT is now below the line so it needs to take back 1,620 (now 1,559) before I feel good about bottom-fishing. 

Anyway, one thing at a time.  So 25,140 is the 200 dma on the Dow and we've fallen from 27,000 so I'd call it 2,000 points to 25,000 in the Big Picture but, in the littler picture, there was super-toppy action at 26,500 ahead of this drop and I'd go by that and a 5% fall to 25,175 is exactly what we got this morning.

Remember, as we were saying in the Webinar, we also have to pay attention to the time-frame of the bounce because a strong bounce that takes longer than the dip is not a very strong bounce and more likely to fail so we've only got today to hit that 25,700 line or we'll have to push our hedges higher into the weekend.

Given the Dow had a 5% correction, we can expect the same action from the other indexes so:

2,940 x 0.95 is 2,793 so let's call it 2,800 and call it 2,950 to keep things neat and that's 150 points so 30-point bounces to 2,830 and 2,860.  Problem is we overshot the mark but that's OK as a 30-point (20%) overshoot to 2,770 is normal enough but we need to see that taken back very quickly to support the 5% line. 

From an intra-day perspective, we stick closer to what actually happened on the chart and that's 2,880 (the 50 dma) to 2,750, which is 130 points so call those bounces 25 points to 2,775 and 2,800 so just getting back to the -5% line is the goal of the day otherwise – DOOM!!!!

Nasdaq 7,700 was the high-water mark and that is exactly 42.5% over the old Must Hold level of 5,400, where we topped out in 2000.  As we know, it's really the AAPLDAQ so let's consider AAPL's high of $233 and 5% below that is $221 and AAPL blew that but they really topped out at $230 since 9/1 so better to work with that and call it $218.50 which is $12 so $2.50 bounces and $216 is the overshoot.

Pretty much we can watch AAPL for the story of the whole market.  Is the most valuable company on Earth (by a wide margin now) and the only one that comes close to justifying it's $1Tn valuation able to attract bidders after a 5% correction.  If not – what hope can the rest of them have?  If AAPL fails to hold $216 – then the 10% line on AAPL is $207 and below that is a 20% correction = all the way to $184 but, as you can see on the chart – AAPL was obeying those lines on the way up – so why wouldn't it on the way down?

Pre-market we're at $213.  

So, getting back to /NQ, we're in a 10% correction (which is why SQQQ was our primary hedge) from 7,700 to 6,930 and the 5% correction was 7,315, which held on 10/8 but wasn't even a pause yesterday so I hesitate to even used 7,315-6,930 as a range.  If I did, the strong bounce of that drop would still be the weak bounce of the 10% drop so I'd have to say that NOTHING less than the weak bounce of the 10% drop on the Nasdaq would be in the least bit bullish.

7,700 to 6,930 is 770 points and 20% of that is 154 points so 7,084 we can call 7,100 and that's our primary goal and 150 over that is 7,250 and that's where we start to recover.  Given that AAPL $184 is RIDICULOUS and would cause me to sell everything and buy AAPL, I'd say we're not going to get a 20% correction or, if we do – it will be a brief one.  

We are, however, in a panic and there are other Nasdaq stocks that deserve to be much lower so AAPL may get dragged down with the index – I just don't see it lasting.  We're checking our bounce lines mostly to know when to cash out our hedges – not so much to get bullish too quickly!  

So NOTHING less than 7,100 on /NQ is going to be a bullish indicator and the same 150-points below 6,930 – call it 6,800 would be an overshoot to the downside on a 10% correction but below that is – DOOM!!! 

That leaves us with the Russell, the index that started this disaster.  It topped out at 1,740 back in early Sept and everyone acted like it didn't matter that small caps were correcting (or that the rest of the world was correcting) until, suddenly, it did.  I don't want to say I TOLD YOU SO but….

Anyway, 1,440 was the Must Hold line on the RUT and 1,728 was the 20% line so that's the line we'll use and that makes 1,555 the 10% correction but really it's 1,584 that matters as that's the 10% line from the Must Hold, which always takes precedence once you get in the zone.  

That's right, as of this morning, the 1,584 box on the Big Chart goes RED for the first time since early May!  The 12,800 box is also red on the NYSE and it's been a long, long time since the boxes have come into play but gaining two red boxes is VERY BEARISH and we can't be bullish again until one of them goes away – so both of those lines are VERY SIGNIFICANT.  

So, getting back to the RUT, it's 1,584 or bust into the weekend and we're at 1,560 pre-market, off a low of 1,552 – which is the 10% line so, below that is – DOOM!!!

Hopefully, that's a nice, clear guideline to get your day's trading started.  

I think 2,750 on /ES is the best long line with tight stops below and 6,780 on /NQshould be fun if dip buyers come in with a stop below 6,775 (Nasdaq loves those 25-point lines) and then we'll watch the rest of our bounce lines to see if we're going to add more hedges or take profits on the ones we have.  

So we're playing for the bounce but we're a bit skeptical as we feel there may be a bit more selling to come.  As noted, we had a long trade on Gold (/YG) in yesterday's Live Trading Webinar that made just under $600 per contract when I called it off but Gold is still going higher this morning and that's going to be great for our long-term plays on the miners, as well as our 2017 Trade of the Year, Wheaton Precious Metals (WPM), who got attractively cheap again last month, leading to this call for our Long-Term Portfolio:

WPM – Time is our friend on this one as we have to wait patiently for silver to pop.  Our 40 2020 $15 calls are $3.55 ($14,200) and I don't want to sell them unless they go below $3.25 ($13,000) so we risk $1,200 but no worries if they stay over $17.   I want to add 50 of the 2021 $12.50 ($6)/20 ($2.25) bull call spreads at $3.75 ($18,750) so that's our "roll" and hopefully we can eventually get that much for the 2020 $15s to make it an even one

Short Put 2020 17-JAN 22.50 PUT [WPM @ $17.26 $0.00] -10 1/3/2018 (463) $-4,000 $4.00 $1.85 $-1.15     $5.85 $-0.10 $-1,850 -46.3% $-5,850
Long Call 2020 17-JAN 15.00 CALL [WPM @ $17.26 $0.00] 40 9/4/2018 (463) $15,000 $3.75 $0.05     $3.80 $0.05 $200 1.3% $15,200
Long Call 2021 15-JAN 12.50 CALL [WPM @ $17.26 $0.00] 50 9/21/2018 (827) $28,250 $5.65 $1.03     $6.68 - $5,125 18.1% $33,375
Short Call 2021 15-JAN 20.00 CALL [WPM @ $17.26 $0.00] -50 9/21/2018 (827) $-10,850 $2.17 $0.42     $2.59 $0.09 $-2,100 -19.4% $-12,950

So that's our position on WPM at the moment in our Long-Term Portfolio and already the new spread is up about $3,000 with a very nice recovery from the old calls so now we want to watch the stop at $3.25 carefully and raise it to $3.50 when we cross $4, etc.  Anyway, the reason I'm bringing it up is it's still good for a new trade since the short puts are in the red so (without the extra 40 long 2020 calls, which you don't need for a new trade), the net of the spread is just $14,575 but the upside potential at $20 is $62,500 for a potential $47,925 (328%) gain over the next two years.  That's a nice trade!  

When the market is correcting, we look for things that are good to buy and WPM is a good value play and also a good hedge against Dollar weakness with a lot of leverage to silver and gold but, because they are a contract streamer and not a miner, they are also hedged against continued weakness in the metals market – as long as it doesn't go on for more than a year.  

There are always going to be plenty of stocks to buy in a correction like this – you just have to know where to look and this, so far, is just a mild correction but that doesn't stop people from irrationally panicking out of some positions – leaving us with some great opportunites for bargain-hunting.  

Nothing has happened to support the markets so far but here are some of the things that can turn things around – at least to create a dip-buying rally but whether or not that's enough to crack the strong bounce lines remains to be seen:

  • Trump could stop calling the Fed "crazy" (not likely, he needs someone to blame for the market sell-off since he's been using the market rally to measure his success)
  • The Fed could capitulate to Trump and say they won't raise rates anymore (not likely as yesterday's 10-year auction was not pretty – even at 3.25%.  Today there's a 30-year sale that also is not likely to show much demand).  
  • Brexit could be worked out (50/50 – at this point, Germany needs to put this behind them as badly as the UK does)
  • China trade deal could be worked out (not from the sound of yesterday's chatter) 
  • Tomorrow's Bank Earnings (C, FRC, JPM, PNC, WFC) could be better than expected (not likely with housing tanking over the summer)

So we're playing for the bounces but mostly watching and waiting to see if any of the negative news items change and whether or not any of the bounce lines hold but, if not, we'll be adding some more hedges into the weekend – into this evening actually – as I'm very worried about those bank earnings!  

 

Provided courtesy of Phil's Stock World.

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