Option Investor

Daily Newsletter, Thursday, 8/23/2018

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Just Hanging Around

by Thomas Hughes

Click here to email Thomas Hughes


The broad market tread water near its all-time high for a third day. Today's action was influenced by another (expected) round of tariffs coming into effect. This round is worth a total of $32 billion in Chinese and US goods ranging from motorcycles to semiconductors, plastic, steel products and fuel. If we believe Trump's Tweets, and there is no reason not too, he's prepared to put tariffs on all Chinese goods. Meanwhile, the mid-level talks between Chinese and US delegates continue in D.C., and there has been zero news about the meeting.

Asian markets were mixed in Thursday trading as new trade tariffs take effect. The Shang Hai Composite led the major markets with a gain of 0.37% followed by the Nikkei's gain of 0.22% while the Hong Kong Heng Seng Index shed close to -0.49%. European markets were mostly lower but closed closer to flat than not. The DAX led with a loss of -0.16% followed closely by the CAC and FTSE.

Market Statistics

Futures trading was flat to negative all morning. There was little news to move the market but plenty to make traders wary. The SPX opened with a loss of -0.10% and traded near that level for most of the day. There was a brief push higher in early trading and then a small push lower, but neither move amounted to much. By the end of the day, the broad market was very near the level at which it began trading and created a small doji candle at the close.

Economic Calendar

The Economy

Initial claims for unemployment fell -2,000 from last week's upward revision to hit 210,000. Last week's figure was revised up by 8,000 resulting in a net gain from last week's figure to this week's. The four week moving average of claims fell despite the revisions and is down -1,750 from last week. The unadjusted data shows a -3.9% decline in reported claims and is down -11.4% over this same time last year, consistent with labor market tightening.

Continuing claims fell -2,000 to 1.727 million. The last week's figure was revised higher by 8,000 resulting in a net gain in this week's data. The four-week moving average fell by -5,000 to 1.735 million and is trending lower, consistent with labor market tightening.

Total claims fell by -52,458 to 1.704 million. This decline is in line with seasonal and long-term trends indicative of labor market tightening. This week's figure is down -11.25% over the same time last year and shows accelerated tightening relative to the past few years. I expect to see this figure fall below 1.5 million by late fall.

New Homes Sales fell -1.7% versus an expectation for a slight increase. Despite the miss, sales remain up over last year and are now +12.8% YOY. The miss in sales is due to rising rates and prices, a factor that is likely to weigh on sales over the next year.

Markit's Flash PMI readings show a slight decline in US economic activity in August. On the manufacturing side, activity fell to 54.5 from 56.3 and missed expectations by -0.6. On the services front, activity fell to 55.2 from 56 and missed expectations by -0.7. The good news is that both readings are above 50 and indicative of broad economic expansion.

The Dollar Index

The Dollar Index rebound in today's session as tariffs, trade war, and labor lead the dollar higher. The index created a medium-sized green candle with shaven top after advancing nearly 0.65%. The candle is bullish and moving up from and through support targets near the $95.50. This move is trend-following and supported by outlook which now shows a 68% chance for two more rate hikes this year. The indicators remain bearish which may lead to another test of support, so long as it holds a move to $97 is likely.

The Gold Index

Gold prices fell in today's session, confirming resistance at the $1,205 level. The spot price shed nearly -1.0% and created a medium sized red candle. The indicators remain bullish so another test of resistance is possible although the trend is down and today's action is trend-following. A move lower may find support at the recent lows near $1,180, a move below that would indicate a continuation of the downtrend.

The Gold Miners ETF GDX fell more than -3.65% in today's session confirming resistance at the $19.00. This move is bearish and trend-following but may be halted at the recent low. A break below the low, near $18.20, could take the ETF down to $17.00 or lower. This move is due to economic health, earnings outlook, and a strengthening dollar and could result in a sustained downtrend in the mining stocks.

The Oil Index

Oil prices pulled back on today's dollar strength, but the selling did not result in a big decline. The black gold shed about -0.50% in a move that tested, and confirmed, support at the moving average. The indicators remain bullish and in support of higher prices so it looks like another surge upward could come over the next few days or weeks. A move up may find resistance at $70, a move above there could go to $74. If the price falls below the short term 30 day EMA the next target for support is $66.

The Oil Index pulled back along with the underlying commodity, but the move was small, and prices appear to be supported. The caveat is that today's action is indicative of resistance at the short-term moving average that may prevent it from moving higher. The indicators are rolling into a bullish trend-following signal, but MACD has yet to confirm which is a reason for caution. If the index falls from here, it is likely to find support at the long-term moving average near 1,450. A move above the short-term moving average would be bullish and could take it up to 1,575 or higher.

In The News, Story Stocks and Earnings

Alibaba reported stellar growth and beat expectations, but shares fell hard on the news anyway. The company reports a 61% increase in revenue over the same time last year, but the news just wasn't enough to support prices. The monthly active user growth, while positive, was a bit below expectations and have caused concern for the future. What the market needs to focus on is the 93% growth in cloud computing; cloud computing, data centers, and AI are the future, and this company is on the bleeding edge of it. Shares opened higher but fell throughout the day to create a long red candle re-confirming resistance at the moving averages (which are showing a bearish crossover).

The retail sector produced another mixed bag of results; where one company beat expectations and gave a positive outlook another did the opposite. Today's news included results from ProFlowers (missed) and 1-800-Flowers (beat) as well as The Children's Place (beat), Steinmart (miss) and Sportsman's Warehouse (beat). The XRT Retail Sector SPDR opened with a slight gain but came under pressure during the day. The ETF created a small doji candle to the side of Wednesday's larger doji and is indicative of market indecision. A move up would be bullish and is supported by the indicators. A move lower would confirm resistance and send the ETF down to $51 or $50.

The VIX moved up in today's session and created a small green bodied candle. Today's action indicates support at the 12.00 level and the possibility fear could move higher. The indicators are a bit mixed, consistent with range-bound trading, and suggest that over the longer-term volatility may trend sideways within the range of 10.00 to 15.00. Regardless, the VIX is still at low levels associated with the bull market and not expected to make a major reversal any time soon.

The Indices

The market moved broadly lower in today's session although the losses were minimal. Today's loss-leader is the Dow Jones Transportation Average with a decline of -0.54%. The transports have extended their retreat from the new all-time high and beginning to show some weakness in the indicators. Both MACD and stochastic are rolling into bearish crossovers after forming lower peaks while the market set its all-time high. A move lower is indicated, but it may not go far. The first target for support is at today's low; the next is near the short-term moving average at 11,050.

The Dow Jones Industrial Average closed with the second largest decline, -0.29%. The blue-chip index created a small red candle extending a retreat from the fresh 6-month high and looks like it could drift lower. The indicators remain bullish but are showing some weakness in the form of divergences that may lead the index lower. If it does continue to fall the first target for support is near 25,360 and the combined strength of a long-term uptrend line and short-term moving average.

The S&P 500 posted the third largest decline at -0.16%. The broad market index created a third spinning top candle just below recent and all-time high levels with weak indications of bullishness. Both the MACD and stochastic have diverged from the near-term rally leading me to think a top may form soon, if not at the all-time high. A move up would be bullish and trend-following, a move lower may find support at the short-term moving average.

The NASDAQ Composite posted the smallest loss at -0.13%. The tech heavy index created a small spinning top doji that came very close to setting a new all-time high. Today's action does not look bullish but price action over the past month may be forming a flat-topped triangle. The flat-topped triangle can be a very bullish signal if confirmed, but right now the indicators are rolling into a bullish trend-following signal. A move up would be bullish if it closes at a new all-time high, a move lower may find support at the short-term moving average.

The market looks like it wants to move higher but can't make up its mind to do so. The fundamental outlook for economic and earnings growth support the idea of higher prices for stocks, but the near-term sentiment is weighed on by trade fears, geopolitics and more. The fact that trade or Trump news could come at any minute is reason enough to for me to be wary of bullish signals. The fact that the earnings cycle is over seals the deal, at least until price action convinces me otherwise. Until then I remain firmly bullish for the long-term but cautious for the near-term.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Weekend Worries

by Jim Brown

Click here to email Jim Brown

Editors Note:

With a constant stream of negative headlines investors are probably gun shy about what the weekend holds. With the ever increasing soap opera surrounding Trump's legal problems and the president of the National Enquirer, a long time friend of the president, receiving immunity on Thursday, there is no telling what the weekend may bring. On the plus side Fed Chairman Jerome Powell will speak at the Jackson Hole symposium Friday morning and there could be a dovish surprise. With President Trump taking aim at Powell and the Fed this week for hiking rates too fast, Powell could tone down his remarks about future hikes while still trying to remain politically independent. No government or high ranking official wants to get into a Twitter war with the president so Powell may try to sidestep the issue and that could be seen as somewhat dovish.


New positions are only added on Wednesday and Saturday except in special circumstances.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Chinese Disappointment

by Jim Brown

Click here to email Jim Brown