The market posted strong gains last week and then consolidated those gain the first two days this week. The consolidation created a base for the explosive post Fed move today.
The markets are up strong for the last three weeks. If the indexes can add to today's gains it could stretch to four weeks but I think our string of good luck is running out. Today was another window dressing day for fund managers trying to end their fiscal year with winners in their portfolio. October 31st is their fiscal year-end.
There are different ways of accounting for positions and some want cleared trades in their portfolio at the end of the month. Wednesday was the last day to buy and have your trades cleared in October. Personally, it does not make any difference to me whether they clear on Friday or next week but historically the volume of purchases tends to slow down on the last two days of the month. Typically, there is just enough volume to sustain market levels but not enough to push them higher.
A couple of my indicators triggered a sell signal on Wednesday. The MACD gap width and height compared to the last 9 months is extremely overbought. The RSI approaching 70 is also very overbought. The 20-day moving average is 72 points away from the cash close on the S&P. That is the most extreme distance in more than a year.
All of these are indicators of extreme overbought conditions. They have nothing to do with fundamentals or long-term market direction. These are short-term indicators that suggest there is some profit taking in our immediate future.
I have been writing in Option Investor that I expected weakness late this week and probably at some point next week. The end of year window dressing will be undressed at some point if the market appears to soften.
I would be cautious about adding to long positions until we see what the next 5-7 days bring in the market. I do believe we will finish November at a higher level and possibly at new highs but we need to consolidate the three weeks of gains before we sprint much higher.
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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.
No Position Changes
XBI - Biotech ETF (Put Spread)
The biotech sector has suddenly found some traction and is moving off the six week base. This appears to be a good candidate for a put spread. The November strikes do not have any premium so I am going out to December.
Sell short Dec $60 put, currently $1.55, stop loss $61.65
Buy long Dec $50, currently 50 cents, no stop loss.
LRCX - Lam Research (Put Spread)
On Oct 21st Lam Research said it was acquiring KLA-Tencor (KLAC) for $10.6 billion. Normally when a company announces an acquisition the stock goes down. Citi immediately affirmed a buy rating on LRCX and praised the acquisition. They said the combination of LRCX and KLAC would represent a "formidable competitor" to Applied Materials (AMAT). Citi said the two companies do not have any areas of overlapping products but the customers are the same. Shares of LRCX spiked $5 on the announcement and have continued to move higher. The close today was a three-month high.
Sell short Nov $70 put, currently .75, stop loss $71.75
Buy long Nov $62.50, currently .15, no stop loss
Net credit 60 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.
Symbol - Strikes - Credit - Earnings
PUT - RH - 95.00/85.00 - .50 Dec 10th
CALL - APC - 70.00/75.00 - .53 - January
CALL - ADPT - 75.00/85.00 - .95 - Feb 18th
Existing Play Recommendations
Links to original play recommendation
ADI - Analog Devices (Put Spread)
XBI - Biotech ETF (Bear Call Spread)
MON - Monsanto (Put Spread)
WYNN - Wynn Resorts (Call Spread)
HOG - Harley Davidson (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.