With bullish sentiment crumbling fast, are we headed for a bear market?

Editors Note:

The Dow dropped -393 points intraday and rebounded +398 points to close slightly positive. Normally that would be considered a potential capitulation event but the A/D line was only 3:4 advancers to decliners. That is just a normal day in the market.

Normally after a big rebound like that we would see the S&P futures strongly positive overnight as traders jump on the positive rebound. That is not happening with the futures down -6 as I type this.

Both the Dow and S&P broke through the 200-day average and both rebounded back above it. However, the Dow posted a 4-week intraday low and very close to a 3-month low. One more intraday drop like today and I seriously doubt there will be a rebound. Once the Dow closes under the 200-day it could be a long drop. A bear market drop of 20% would be 21,292. I am not predicting that but markets that decline more than 10% tend to really rack up the points once that 10% level is broken.

The S&P came very close to retesting the 10% correction level from February & April and there are no such things as triple bottoms. Normally the third test of a critical level fails. The Dow and S&P are in bearish descending triangles and those normally produce a breakout to the downside.

We were lucky last week. Nothing was stopped. That is a reason to celebrate. However, given the market volatility I am passing on adding new plays today. We have already endured enough punishment for this option cycle and the potential for a market breakdown is very high. There will be plenty of time to trade once the volatility passes, which it will eventually.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email



NEW NON-DIRECTIONAL PLAY

No new positions today given the extreme volatility in the market.



Current Portfolio


Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.



Stop Loss Plan:

If a stop loss is hit, immediately sell the next higher option. With most brokers you can place a contingent order. For instance, if NFLX trades at $351, buy to close May $375 call, sell to open May $385 call. You may have to make it two different orders. If we are stopped and you reopen the position like this, add $7 from the stop price for the new stop. If we are stopped again do not reload. Reverse the procedure for the put side.


Play Updates

ADBE - Adobe Systems - Company Profile

Comments:

Adobe was holding in the middle of its recent range until today's $5 gain. We are still safe with decent resistance at $230. The premiums are evaporating as we move closer to May expiration.

Original Trade Description: April 22nd

Adobe Systems Incorporated operates as a diversified software company worldwide. Its Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote, and monetize their digital content. Company description from FinViz.com

Adobe spiked higher on great earnings and ran into resistance at $230. The choppy market has prevented the stock from moving higher over the last month. With the focus on other tech earnings this week, Adobe could be forgotten and left to wander between $230-$215.

Earnings June 14th.

Position 4/23/18:
Short May $245 Call @ $1.55.
Long May $265 Call @ $0.68.
Short May $200 Put @ $1.06.
Long May $180 Put @ $0.23.
Net credit $1.60.

Position 4/24/18:
Short May $200 Put @ $1.06, exit $1.90, -.84 loss.
Short May $190 Put @ $.95.


NFLX - Netflix - Company Profile

Comments:

No specific news and no material movement. If we had not been stopped out of the short puts the prior week this would have been a perfect week.

Original Trade Description: April 22nd

Netflix, Inc., an Internet television network, engages in the Internet delivery of television (TV) shows and movies on various Internet-connected screens. It operates in three segments: Domestic Streaming, International Streaming, and Domestic DVD. The company offers TV shows and movies, including original series, documentaries, and feature films. Company description from FinViz.com

Netflix spiked on earnings to a new high but it was only $5 over the old high. Shares seem to have stalled at those levels. While I do not expect Netflix to collapse, I doubt it is moving significantly higher without a bullish market.

Earnings July 16th.

Update 4/27: The Wednesday market crash knocked us out of the initial May $285 short put and we adjusted down to the May $275 put. The stock continued to decline and the new put was also stopped out. When the stock drops $36 in three days, we would have been stopped out regardless of the position. We no longer have as short put on NFLX.

Position 4/23/18:
Short May $375 Call @ $1.39.
Long May $395 Call @ $0.41.
Short May $285 Put @ $1.54.
Long May $265 Put @ $0.55.
Net credit $1.96.

Position 4/24/18:
Short May $285 Put @ $1.54, exit $3.26, -1.72 loss.
Short May $275 Put @ $1.92, exit $3,25, -1.33 loss.
We no longer have a short put on Netflix.


NVDA - Nvidia - Company Profile

Comments:

Nvidia moved sideways for the last week until the market rebounded Thursday afternoon and the stock exploded higher with a nearly $7 gain.

Earnings are next Thursday after the close. We need to close the SHORT sides of this position at the close on Wednesday. I would leave the long sides open just in case there was a monster post earnings move.

Original Trade Description: April 22nd

NVIDIA Corporation operates as a visual computing company worldwide. It operates through two segments, GPU and Tegra Processor. The GPU segment offers processors, which include GeForce for PC gaming and mainstream PCs; GeForce NOW for cloud-based game-streaming service; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for AI utilizing deep learning, accelerated computing, and general purpose computing; GRID provides power of NVIDIA graphics through the cloud and datacenters; DGX for AI scientists, researchers, and developers; and cryptocurrency-specific graphics processing units. The Tegra Processor segment provides processors designed to enable branded platforms - DRIVE and SHIELD; DRIVE automotive computers and software stacks, which offer self-driving capabilities; SHIELD devices and services designed for mobile-cloud in home entertainment, AI, and gaming applications; and Jetson TX 2, an AI computing platform for embedded use. Company description from FinViz.com

Shares have been moving sideways in a wide range. Multiple headlines negative to the chip sector have weighed on the stock. Resistance at $250 is strong as is support at $217.

Earnings May 10th before expiration.

Nvidia was another casualty of the Wednesday market crash. We were stopped on the initial $190 put and we added a $180 put and lowered the stop loss by $7. Shares are back in the middle of their range and we are relatively safe unless the market crashes again.

Position 4/23/18:
Short May $260 Call @ $2.55.
Long May $280 Call @ $0.66.
Short May $190 Put @ $1.60.
Long May $170 Put @ $0.54.
Net credit $2.95.

Position 4/25/18:
Closed Short May $190 Put, exit $4.10, -2.50 loss.
Added Short May $180 Put @ $2.56.


STMP - Stamps.com - Company Profile

Comments:

The earnings date changed for STMP and they reported after the close today. The stock spiked $7 in afterhours but that was well off the highs. Recently, a lot of stocks have crashed after earnings and there is always the chance that will happen here as well. Otherwise we have a good chance of being stopped out if the gains hold. The stock declined from resistance today and without any earnings expectancy to lift it higher we could see it fade back to neutral territory.

Original Trade Description: April 22nd

Stamps.com Inc. provides Internet-based mailing and shipping solutions in the United States. The company offers mailing and shipping solutions to mail and ship various mail pieces and packages through the United States Postal Service (USPS) under the Stamps.com and Endicia brands. Its solutions support various USPS mail classes, including First Class Mail, Priority Mail, Priority Mail Express, Media Mail, Parcel Select, and others. Company description from FinViz.com

Shares dropped on the 13th on news the Post Office was going to investigate discounted postage rates. The target was Amazon but Stamps.com also has a sweet deal and any investigation could suggest reducing their discount. Shares have rebounded but are approaching resistance at $230.

Earnings May 23rd.

Position 4/23/18:
Short May $260 Call @ $1.85.
Long May $280 Call @ $0.35.
Short May $175 Put @ $2.18.
Long May $155 Put @ $.35.
Net credit $2.89.




If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Don't wait until you miss a newsletter to decide you want to take the plunge.

subscribe now