The index moves have been so fast and furious over the last week that it is not surprising that most traders are confused. The real question is "Which way are we going."
I would pay a lot of money to know the answer to the direction question. Many technical levels have been seriously broken only to see the indexes reverse and have those levels come back into play again.
The 200-day on the S&P at 2,075 was severely broken this morning with a decline to 2,052. The afternoon rebound to close at 2,086 put that 200-day average back into play. However, once any support level is broken severely it never carries the same weight on the next retest.
Powering the rebound today was the idea that the lows for the day were a successful retest of the lows from early July. The closing low on July 8th was 2,046 and we came within 6 points of that low today. For four days surrounding July 8th the S&P traded at the 2,044-2,052 level for intraday lows. That created significant support and we retested that today. The range band from the July lows is in yellow.
The Dow had a similar support test at 17,125. This was the support range from February. However, the Dow is in a significant down trend. That intraday pause at 17,125 did not magically rescue the Dow from its trend. More than half of the Dow stocks are in a correction. The currency devaluation in China is only going to make earnings worse for the international companies in the Dow, which is most of them.
More than 56% of the S&P-500 is in a correction. More than 60% of the Russell-3000, the top 3,000 U.S. stocks, are in a correction. While the rebound from -278 at the lows today was impressive it does not mean the decline is over. The afternoon rebound was a short squeeze brought about by a huge number of traders shorting the market over the last couple days. When the rebound started gaining traction those traders began covering.
Obviously, the markets can go in any direction they choose from here. Nobody can guarantee a specific direction and they are either lying or delusional if they claim to know the answer. Based on the Dow chart I believe the market may continue lower. We do not know where the currency devaluation is going to settle or the impact on the market. When in doubt trade in the direction of the Dow and the Dow chart is pointing lower.
We were stopped out of two positions in the recent market volatility. Considering the width of the market swings, I am surprised it was not worse.
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Items shaded in blue were previously closed.
Current Position Changes
Stop Loss Updates
Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.
XOP - Exploration ETF (Stopped)
Investors must be bottom fishing in energy stocks. With oil prices hitting the lows from March in the $42 range the XOP has rebounded 10% in the last five days. What is wrong with this picture? Analysts are predicting lower lows for oil prices. The only logical answer is that some bargain hunting has triggered some short covering. Fortunately, this was an August position so we escaped with almost a maximum profit.
I am recommending retaining the long call although it has a 99.9% chance of expiring. It has no value today but you never know when a geopolitical event could shake up the market.
Stopped Aug $46 short call, entry .87, exit .03, +.84 gain
Retain Aug $49 long call, entry .26, currently zero, -.26 loss
Net gain 58 cents.
GLD - Gold ETF (Stopped)
The Chinese currency devaluation and market turmoil produced a safe haven trade in gold. The gold futures contract rallied $40 since the $1,083 low on the 7th. We were stopped out of the short position today. The long position has value and I am recommending we close it before that value fades.
Stopped Aug $108 short call, entry .39, exit .51, -.12 loss
Close Aug $111 long call, entry .06, currently .16, +.10 gain
Net loss 2 cents.
ZOES - Zoes Kitchen (Stopped)
We were stopped out of the ZOES short put last Thursday when the stock broke below support at $43 in the early stages of the current market weakness. Fortunately, it was an August position and we exited that call profitably. This was a reentry from the earlier stop and we regained most of the premium.
The long $35 put is still in play. If the market continues to be weak we could see ZOES sink lower. I would not close it today but I would watch it for a spike in premium to 25 cents or more and exit then. That would make the entire position a breakeven. We have 7 days left on that contract.
Stopped Aug $40 short put, entry $1.39, exit .45, +.94 gain.
Retain Aug $35 long put, entry .34, currently .05, stop .25
HOT - Starwood Hotels (Bear Call Spread)
Starwood options are not behaving properly. The stock is declining but the call options are rising. There is a decent amount of option volume in the calls and almost none in the puts. With support about $4 under the current price and the stock in a sharp decline, something does not add up.
After the bell today, the company announced a 37.5 cent quarterly dividend payable on Sept 25th to holders on Sept 11th. There was no movement in the stock after the bell.
Starwood has been on a media blitz. Since August 6th they have issued 7 press releases. Apparently they are trying to shore up the stock price and prevent it from declining further after their earnings disappointment.
I lowered the stop loss on the short option.
I am not recommending any changes to the position. Now that the dividend has been announced we could see any dividend expectations evaporate. I doubt many investors will be rushing out to buy a $76 stock to earn a 37-cent dividend.
Maintain the position and let us see what happens.
Short Sept $82.50 call, entry $1.10, currently $1.35
Long Sept $90 call, entry .48, currently .17.
GPRO - GoPro (Bear Call Spread)
Shares of GoPro declined nearly $10 on the China currency devaluation on fears their high dollar cameras would now cost even more in China. To be fair the company reported strong earnings and guidance so this could be just an overreaction to the headline. I am picking a short strike that would be a new 2015 high if reached. With the market oozing negativity that may be a difficult task to move higher in this market.
Earnings Oct 29th.
Sell short Sept $65 call, currently $1.30, stop loss $60.25
Buy long Sept $70 call, currently .65, no stop.
Net credit 65 cents.
YUM - YUM Brands (Bear Call Spread)
YUM Brands declined -$10 over the last two days on the Chinese devaluation. The majority of their earnings come from China. With a 3% devaluation over the last two days that will pressure their earnings. Also, the bad economic numbers from China are suggesting the economy is plunging rather than growing at a 7% GDP. That suggests consumer sales could be pressured.
Sell short Sept $85 call, currently $1.31, stop loss $83.75
Buy long Sept $90 call, currently .59, no stop
Net credit 72 cents.
These were potential plays I did not use today. If you are looking for something else to play you can start here. These are not official recommendations.
Bear Call Spreads
Symbol Strikes Credit
FEYE - 47/50 - .42
TRIP - 77/82 - .75
GMCR - 57/62 - .58
OPHT - 60/65 - .55
WYNN - 105/110 - .90
Existing Play Recommendations
Links to original play recommendation
TIF - Tiffany (Bear Call Spread)
LULU - LuluLemon Athletica (Bear Call Spread)
XOP - Oil Exploration ETF (Bear Call Spread)
YUM - YUM Brands (Bear Call Spread)
NFLX - Netflix (Bull Put Spread)
ZOES - Zoes Kitchen (Bull Put Spread)
GLD - Gold ETF (Bear Call Spread)
ESRX - Express Scripts (Bear Call Spread)
HOT - Starwood Hotels (Bear Call Spread)
QRVO - Qorvo Inc (Bear Call Spread)
Prices Quoted in Newsletter
At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.
The prices quoted in the newsletter are the end of day prices in most cases.
When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.
For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time the readers are able to get a better fill than the opening print because of market maker bias at the open.
For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.
All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.