The severely oversold market is due for a bounce. Buckle your seatbelts and go for a ride.
When the market drops significantly for several consecutive days there is normally a rip your face off short squeeze rally in our near future. We cannot predict the exact date but we know it is coming. The Nasdaq Composite had declined -423 points from last Monday's highs to today's lows. That is a 9% drop in five days.
The Dow Transports have stopped declining after a -31.5% drop. Low oil prices appear to be fueling a rebound in that sector as well.
On a very bearish day I know some readers would expect some new bearish plays. With the market this oversold it is not wise to add new shorts in these oversold conditions.
NEW DIRECTIONAL CALL PLAYS
QQQ - Nasdaq 100 ETF - ETF Description
This is purely a rebound play and not based on fundamentals. The major large cap stocks in the Nasdaq 100 have been crushed and the $NDX had declined -411 points at today's lows, down from 4,300 the prior Monday. This is a -9.5% drop and represents a severely oversold market.
I warned in my weekend Option Investor commentary that we we could expect some follow through on Monday as portfolio managers who missed the Friday reaction drop hit the sell button today. I also mentioned the potential for those managers that did raise cash on Friday to come back to today with a calmer mind and start bargain hunting.
The afternoon rebound suggests those bargain hunters appeared and once the smoke clears we could see a major short squeeze.
With a QQQ trade at $98.45
Buy March $100 call, currently $2.02, stop loss $94.25, just under today's lows.
IYT - Dow Transports ETF - ETF Description
The Dow Transports typically lead the Dow industrials. The transports have been weak because of the slowdown in the manufacturing sector, competition in the airline sector and slowing rail traffic due to the weak shipments of coal and oil field equipment.
For some reason the transports quit declining about three weeks ago about the time oil prices appeared to have bottomed. Now with analysts extending their estimates for low oil prices into 2017 the transports are starting to rise again. Summer is a very busy time for airlines and with low oil prices, their profits should be much stronger even with the added competition.
The transports are very oversold. In Monday's market drop the IYT shares barely moved and ended the day down -38 cents. If we are looking at a potential rebound in the market the transports could lead because of their severely oversold position. The individual stocks have been crushed since early December. The Dow Transports declined -31% off their highs to the January lows.
This is a play on a rebound in the transportation sector. While I admit the fundamentals are still weak the IYT has refused to dip below support for three weeks and set a new high for 2016 last Thursday. This relative strength in a very negative market suggests investors are making their bets there is a rally in the future.
With an IYT trade at $125.85
Buy March $130 call, currently $2.15, initial stop loss $118.75
NEW DIRECTIONAL PUT PLAYS
No New Bearish Plays