Option Investor
Market Updates

Deep cyclicals trying to "bust a move!"

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I don't trade for excitement I trade to make money. Many traders turn their heads in disgust when I start talking bullishly on the deep cyclicals, but if it looks like I can make money trading them, then that's where I'll be. Many traders would look at the chart below and probably be "all over it" if they thought it were a technology stock.

Morgan Stanley Cyclical Index Chart - last eleven months.

Right now, the Morgan Stanley Cyclical Index (CYC.X) looks a little extended, but two sessions ago this index offered option traders a chance to buy calls on a break above 520. The action in this index also should have many option traders keeping an eye on some other "boring" cyclical stocks and their options. These are often times low volatility plays that can consistently put a 20% profit in your pocket in the span of two or three days.

NASDAQ Composite Supply/Demand Chart - 50-point box.

Back in October, subscribers were alert to the "potential" bearish price objective for the NASDAQ near 2,350. We had performed a bearish vertical count for the index so we could assess risk in any bullish trades. By late December and early January of this year (red 1 on chart is early January) the NASDAQ Composite traded as low as 2,251. Not bad for a price projection made back in mid-October! Now we're working with a BULLISH price objective of 3,200. The thing I love about supply/demand charts is that it helps give me the perspective of an institution in how I assess risk. At NASDAQ 2,779, I'm probably "sitting on the fence" as my market risk at this point might be to 2,500 with a bullish target of 3,200. We're also trading right at our long- term bearish resistance line (red +). Subscribers should understand that at current levels, you should not be expecting "huge gains" in bullish trades. Bearish traders shouldn't be expecting huge gains either. The first sign of trouble for a bullish trader on the above chart would come at 2,650, which would trigger a "sell signal". A sell signal is generated when a column of O's exceeds a previous column of O's to the downside.

Jeff Bailey
Staff Analyst

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