Markets responded well to Fed Chair Powell’s comments about their plans in 2019. That led the S&P to clear the 2700 pivot and make a beeline straight up to 2750.
This is the kind of price action you should expect in volatile markets. While many recognize that selling comes quickly, the rallies are just as aggressive as short sellers and cash-rich investors get caught on the wrong foot and are forced to buy in.
With the introduction of new comments, the market is transitioning from a group of “unknowns” causing market corrections to more certainty.
Many are focused on the G20 and China… the current price action indicates that will be constructive. My bellwether stock for this year has been BABA and if you look at how it traded over the past few months, it was one of the first stocks to sell off and currently it is seeing higher lows and accumulation while the rest of the market isn’t.
The other data point that I think is being overlooked here is the CRM earnings report, which was good. There has been a theme that SAAS companies may have milked the market and growth could slow… those software stocks were the last group to get hit during this market correction, and with the CRM numbers they all saw an aggressive bounce.
The largest enterprise software company out there is AMZN. That’s right, it’s not really about Cyber Monday numbers for them… it’s all about Amazon Web Services, and the recurring revenue they receive that, unlike their retail shopping side, actually has good margins.
AAPL is a company that is attempting to transition more into software and services, and MSFT is now also a SAAS company (and this month became the most valueable company in the world).
I mention this theme simply because the 3 largest stocks in the market are all grouped together. And the large indexes are market cap weighted. That means if investors start to anticipate that the SAAS trend isn’t over, these three stocks on their own could buoy the entire market.
As for the technicals, today improved things, but I think the easiest trades right now are looking for hard, fast retracements on stocks that have broken down.
The base case for the overall market remains a wide, choppy range with high reversion. I don’t think shorting here makes sense, because in these kinds of markets the first round of shorts tend to get blown out. That happened at the end of October where the S&P gapped up above 2700, and then saw an exhaustion gap up above 2800. Better to wait for the second extension higher to start selling call spreads into it.
Trade #1: BA
The stock had a failed breakout higher, which led to a test of the lwoer end of the range. After a reattempt to clear above 370, the stock lost 70 points with a capitulative bounce. As the stock heads back into the range, especially if it does so quickly, we have the opportunity to start selling call spreads. I’m using the declining 20 day moving average as my first entry point to start scaling in.
Trade setup
Expected Price: 342
Sell to Open BA Jan 380/385 Call SPread
Tier 1: Enter at 0.70, Exit at 0.20
Tier 2: Enter at 1.00, Exit at 0.50
Tier 3: Enter at 1.30, Exit at 0.80
Trade #2: GS
After being in a rangebound, choppy mess since the beginning of 2017, Goldman is now in a sustained bear market. All major moving averages are pointing lower, and on a weekly chart, the breakout from Oct 2017 looks to be a reasonable target, which is down around 175.
However, shorting into the hole like this is a disastrous plan. It’s very extended to the downside, and with any kind of tick of good news it will cause large cap financials to rally which will drag GS higher with it.
I’m looking for a test of the breakdown levels on the next Christmas rally to plan short entries.
Trade Setup
Expected Price: 209
Sell to Open GS Jan 225/230 Call Spread
Tier 1: Enter at 0.80, Exit at 0.30
Tier 2: Enter at 1.10, Exit at 0.60
Tier 3: Enter at 1.40, Exit at 0.90