The rotational correction continues to play out. The S&P has seen a fairly normal pullback here, retesting the rising 50 day moving average and some previous pivot levels, so it’s not “end of the world” price action…
… unless you dive down into some sectors of the market, and it’s a bit of a bloodbath.
Solar stocks are retesting their lows, and many of the momentum darlings that worked so well over the past 3 months just can’t get off the mat.
This is normal– it’s a reset in momentum stocks while more stable names just continue to churn. There’s been some ugly action in large cap tech, and we are seeing a reset in financial, energy, and industrial names.
We’re also (finally) getting the bid in US Treasuries that is helping this reset. Back last week we started to see signs of instability because of the spike higher in rates, and the best thing for equities right now is if Treasuries start to settle into a bit more of a trading range with more reversion than trend.
Overall, still a constructive market, if you’re in the right markets. We’re going to keep our focus on some reflation trades and an oversold trade in China stocks.
Trade #1: UNP
UNP has a technical breakout look with some “tailwinds” behind it on the news front. Overall structure looks great and the odds of trend continuation are higher here as the reflation trade will bring in more buyers into new highs.
There’s also the hilariously sad container ship that is blocking the Suez canal. Turns out it may take more time to dig it out, which will lead to higher freight costs, which may benefit rail stocks by proxy.
Expected Price: 216.09
Sell to Open UNP 21May21 200/195 Put Spread
Tier 1: Enter at 1.07, Exit at 0.4
Tier 2: Enter at 1.498, Exit at 0.78
Tier 3: Enter at 1.926, Exit at 1.05
Stop Out If Close Under 199.89
Trade #2: HD
An absolute monster of a move after the failed breakdown underneath 255. This is a textbook case of “failed move leads to run to the other end of the range” and the stock has seen a breakout into new highs without any sort of pause.
I think we can plan a long setup in a few weeks, but we’re not there yet. Instead, I’m looking for the stock to make a parabolic run above 300 and that will be a good spot for a fade trade.
Expected Price: 306
Sell to Open HD 21May21 325/330 Call Spread
Tier 1: Enter at 0.84, Exit at 0.13
Tier 2: Enter at 1.176, Exit at 0.4
Tier 3: Enter at 1.512, Exit at 0.53
Stop Out If Close Over 325.11
Trade #3: FXI
FXI has seen a nasty move lower on China reg news. And boy is it worse on individual names– just pull up a chart of BIDU or TME to see how it’s going for these names.
It’s pulling back into a huge level on a weekly chart– I’m not sure the move is completely over, but this is a good spot to initiate risk.
There’s a gap up premarket, I will not chase, if this thing wants to run to 50 without me that’s fine, but there’s probably one more heartbreak move for anyone who bought this dip and will see their stops run out.
Expected Price: 45.34
Sell to Open FXI 21May21 42/39 Put Spread
Tier 1: Enter at 0.38, Exit at 0.07
Tier 2: Enter at 0.532, Exit at 0.03
Tier 3: Enter at 0.684, Exit at 0.03
Stop Out If Close Under 41.89