5 Trade Ideas for Monday: Aflac, Advance Auto Parts, ADTRAN, HollyFrontier and UnitedHealth

5 Trade ideas excerpted from the detailed analysis and plan for premium subscribers.

Advance Auto Parts, Ticker: $AAP
aap

Advance Auto Parts, $AAP, has been building a symmetrical triangle since August. It is testing the top with support for more upside price action from a rising RSI, and the MACD crossed up Friday. The Bollinger bands are also opening higher.

ADTRAN, Ticker: $ADTN
adtn

ADTRAN, $ADTN, is a reversal play. After bottoming last week it has bounced and filled the gap. It has a rising RSI, about to cross the mid line and a MACD that crossed up, both supporting continued upward price action.

Aflac, Ticker: $AFL
afl

Aflac, $AFL, is another bottoming and reversal play. The strong move higher Friday came along with a RSI making a new 1 month high and a MACD about to cross up. Good reward to risk at this position.

HollyFrontier, Ticker: $HFC
hfc

HollyFrontier, $HFC, is yet another bottoming and reversal play. The Hammer Wednesday was confirmed higher Thursday with a bullish engulfing candle and it saw follow through to the upside Friday. The RSI is turned up and making a new 1 month high with a MACD that is crossing up, both supporting more upside.

United Health, Ticker: $UNH
unh

United Health, $UNH, printed a Spinning Top doji Wednesday, confirmed it higher Thursday and followed through Friday. At resistance now it has a rising RSI on the edge of the bullish zone with a MACD crossing up, to support a push through.

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After reviewing over 1,000 charts, I have found some good setups for the week. These were selected and should be viewed in the context of the broad Market Macro picture reviewed Friday which, heading into the week, sees equities markets looking like they may have dodged a bullet, but still needing to confirm that with a move higher. Elsewhere look for Gold to consolidate with an upward bias while Crude Oil remains biased lower, but is showing a possible bottom. The US Dollar Index looks to consolidate or resume the uptrend while US Treasuries are showing signs of a possible reversal lower. The Shanghai Composite looks ready to resume the uptrend while Emerging Markets are showing signs of a possible reversal higher. Volatility looks to remain elevated and biased to stay there despite the spike and pullback, keeping the bias lower for the equity index ETF’s SPY, IWM and QQQ. There charts show signs of reversal higher with the IWM leading, but all need to prove they want to reverse with a move higher this week, otherwise the risk is to the downside. Use this information as you prepare for the coming week and trad’em well.

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What to expect from the stock market this week

A weekly excerpt from the Macro Review analysis sent to subscribers on 10 markets and two timeframes.

Last week’s review of the macro market indicators suggested, heading into October Options Expiration that the picture for the equity markets was gloomy. Elsewhere looked for Gold ($GLD) to bounce in its downtrend while Crude Oil ($USO) continued lower. The US Dollar Index ($UUP) was strong and biased higher along with US Treasuries ($TLT). The Shanghai Composite ($SSEC) also looked to head higher while Emerging Markets ($EEM) were biased to the downside. Volatility ($VXX) was on the cusp of a break out higher putting equities at risk. The charts of the Index ETF’s, $SPY, $IWM and $QQQ, showed that as well, with the IWM starting a downtrend while the SPY and QQQ were also biased lower in the short run, but looked stronger in the longer timeframe. The week could prove crucial for equities.

TThe week played out with Gold holding its gains while Crude Oil dropped hard before it rebounded late in the week. The US Dollar continued to digest its move higher while Treasuries spiked and pulled back to end the week. The Shanghai Composite moved up to test resistance but held a tight range while Emerging Markets consolidated at the lows. Volatility also spiked to multi-year highs send a shock wave through the markets. The Equity Index ETF’s continued their slide early in the week but the IWM reversed and the SPY and QQQ followed. Will it hold up and what does this mean for the coming week? Lets look at some charts.

SPY Daily, $SPY
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SPY Weekly, $SPY
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The SPY came into the week sitting on its 200 day SMA, raising questions of whether it would hold or not. They were answered quickly Monday with a strong move lower, closing on the low and outside of the lower Bollinger band. This consolidated Tuesday, back into the Bollinger bands, and then resumed lower Wednesday. The Hammer Wednesday signaled a possible reversal but the lower open and failure to make a higher close muddled that despite the Hollow Red candle, showing positive intraday action. Friday’s gap up did confirm a reversal though, but the doji print, signaling indecision, gives caution. The RSI and MACD both showed signs of bottoming and follow through higher would add weight to a reversal and a solid bottom. But we do not have that yet. In fact the price action since July is showing a bearish 5-0 harmonic pattern that would suggest a move to 191.90 would be a trigger to short. The weekly chart shows a Hammer on the 50 week SMA with the RSI still in the bullish zone, over 40. The ramp up in volume along with this supports the case for a bottom. But the MACD is continuing lower. There is support lower at 188.20 and 186 followed by 185 and 181.60. Resistance higher comes at 190.40 and 191.20 before 194. Possible Reversal of the Short Term Downtrend.

Heading into the week, equities markets look like they may have dodged a bullet, but still need to confirm that with a move higher. Elsewhere look for Gold to consolidate with an upward bias while Crude Oil remains biased lower, but is showing a possible bottom. The US Dollar Index looks to consolidate or resume the uptrend while US Treasuries are showing signs of a possible reversal lower. The Shanghai Composite looks ready to resume the uptrend while Emerging Markets are showing signs of a possible reversal higher. Volatility looks to remain elevated and biased to stay there despite the spike and pullback, keeping the bias lower for the equity index ETF’s SPY, IWM and QQQ. There charts show signs of reversal higher with the IWM leading, but all need to prove they want to reverse with a move higher this week, otherwise the risk is to the downside. Use this information as you prepare for the coming week and trad’em well.

Join the Premium Users and sign up here. You can view the Full Version with 20 detailed charts and analysis: Macro Week in Review/Preview October 17, 2014.

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Did the Stock Market Dodge a Bullet

This week started off looking like a Fred Sanford market. “This could be the big one! Elizabeth I’m coming to join you!” Accelerated selling continuing after two weeks of a slow grind lower despite decent earnings reports. But then all of a sudden it stopped. And Friday looks really strong for stocks. Is this the end. Like Neo, did the market dodge a bullet? Maybe. The weekly charts give some clues.

spy

The S&P 500 ETF, $SPY, chart above shows a Hammer candle that is sitting on the 50 week moving average. This is a potential reversal candle, but needs to be confirmed higher next week. The momentum indicator, RSI, has held in the bullish zone for now but the other one, the MACD is still pointing for lower prices. Time to look for those stocks you want to own this weekend and see if the SPY continues higher next week.

tlt

Maybe more interesting is the chart for the US Treasury Bond ETF, $TLT.  The blow off top Noted early this week looks very ugly on this timeframe. But this also needs confirmation by a move lower next week. If it does confirm that is another plus for stocks. But until these things happen it seems best to remain cautious.

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Some Trade Ideas for Google Earnings

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Google, GOOGL, reports earnings Thursday night after the close. The chart below shows that the stock has traded in a consolidating symmetrical triangle since moving higher in November 2014. Ahead of the report the price is falling but holding over that lower trend line.

The Relative Strength Index (RSI) is oversold but as recently as April it was also in this place and bounced with the stock price continuing lower for another month. The other momentum indicator MACD is falling steadily. There is support at 523 and 515 followed by 502 and 487 before a gap to fill to 448. There is resistance higher at 541 and 550 followed by 568 and 580. The pattern break looks for a move of $112 so if it were to be to the downside the target would be 423.

The reaction to the last 6 earnings reports has been a move of about 5.45% on average or $30 at today’s price making for an expected range of about 505 to 570. The at-the money October Straddles suggest a similar $32.50 move by Expiry Friday with Implied Volatility at 124% above the November at 36%. Short interest is negligible under 1%. Open interest favors the 560 Strike, but 600 if it really reacts to the upside. There were buyers of upside Call Spreads yesterday and today sees the same.

googl

Trade Idea 1: Buy the October 530/November 510 Put Diagonal for 50 cents.
A downside directional play that if it collapses will pay close to $20. This uses margin.

Trade Idea 2: Buy the October 525/500/475 Put Butterfly for $4.
A directional downside play with a reward to risk ratio of over 6:1 at the maximum profit level at 500, with defined risk and no margin use. Profitable between 479 and 521.

Trade Idea 3: Buy the October/November 580 Call Calendar for $6.80.
A directional upside play looking for 580 to stop and positive move this week and then continuation. This trade would be adjusted weekly by selling short dated Calls against the November Calls as the previous weeks sale expires.

Trade Idea 4: Sell the October 500/580 Strangle for a $7.50 credit.
A non-directional trade, looking for history and options pricing of the expected move to hold true, with an little extra cushion.

Trade Idea 5: Sell the October 500/580 Strangle and buy the November 500/580 Strangle for $11.
A non-directional trade, looking for history and options pricing of the expected move to hold true, with an little extra cushion, but then strong movement out of the consolidation before the November expiry in either direction.

This is a sample of the daily earnings trade ideas presented in the premium blog.  See more at Dragonfly Capital

The Changing Sentiment in Stock Price Action Alone

Last night I did a webinar hosted by Keith Kerns, discussing signs of market sentiment. My friend Ryan Detrick was there as well and he set the stage for me with his awesome statistics on sentiment. How do you follow Ryan on sentiment?

So when it came to me, I turned to the how to find it in the charts from price action. And there were plenty of examples in Thursday’s market. Here are a few I highlighted.

tlt

It started in Bonds. The Bond ETF ($TLT) rocketed higher in the premarket, creating the gap in the chart above. After the open it continued higher but stalled as the RSI on the 5 min chart went over 93. A blow off top in the making. The second candle confirmed it as did the massive volume. This was your first clue that sentiment in bonds was changing, and that might be a good thing for equities.

iwm

The second signal came quickly after as the Russell 2000 ETF, $IWM, opened down and traded lower. This completed a bullish Butterfly harmonic pattern. Harmonics are derived from Fibonacci ratios, common in nature and pleasing to the human eye. They make the price action look and feel right. Yeah, I know, I’m crazy. But the price dipped below the trigger point and then rocketed higher, printing a bullish engulfing candle on the day. This shows strong buying pressure, positive sentiment.

spy

The final sentiment picture comes from the S&P 500 ETF, $SPY, above. It could be the Nasdaq 100 ETF, $QQQ as well. Both look the same with the major difference that the QQQ is just touching its 200 day moving average. The SPY shows rising volume on the pullback over September and the first half of October. This exploded today though. It also shows the momentum indicator, RSI leveling as it touches oversold territory. The candlestick, a Hammer, indicates a potential reversal as many know. But the picture it represents is quite compelling. The SPY opened with a gap lower and proceeded to get crushed, before buyers ripped it back higher to end the day only marginally lower on very high volume. If this does not scream a change in sentiment to you then you need to relearn your technical analysis.

All of these signals combined suggest that there may be some upside for equities in the future.  It may not start Friday but continued action like this will reinforce the idea of a reversal.  Will it be back to the prior highs or just for 3 days and then fall again?  I do not know, nobody does.  But sentiment may be changing for right now.  Be cautious and use stops, but prepare for possible upside in the market.

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Trading Earnings 10-15-14: Goldman Sachs and Netflix

Two names today, one that reports after the close tonight, Netflix, $NFLX, and one before the open Thursday, Goldman Sachs, $GS.

Netflix, $NFLX
nflx

Netflix, $NFLX, had a strong move higher from May to June and then has settled, but with a couple of higher lows and higher highs. A slower rising trend but still trend higher. Into earnings it is testing the recent support while the Relative Strength Index (RSI) is pulling back and testing the bullish zone limit with the MACD falling. There is support lower at 435 and 419 followed by 401.50 and 377. There is resistance higher at 440 and 455 followed by 467 and 473 before 487. The reaction to the last 6 earnings reports has been a move of about 11.02% on average or $48 making for an expected range of 380 to 480. The at-the money October Straddles suggest a smaller $31.50 move by Expiry with Implied Volatility at 108% above the November at 40%. Short interest is high at 10%. Open interest favors the 445 to 470 Strike range if it reacts well and the 425 to 455 Strikes otherwise. There were sellers of October/December 445 Put Calendars yesterday and buyers of the October/December 450 Call Calendar.

Trade Idea 1: Buy the October 430/400 Put Spread for $10.

Trade Idea 2: Buy the October 425/415-405 1x2 Put Spread for free.

Trade Idea 3: Buy the October 425/410/395 Butterfly for $2.75.

Trade Idea 4: Buy the October 460/470 1x2 Call Spread for free.

Trade Idea 5: Buy the October 460/470/480 Call Butterfly for $2.15.

Trade Idea 6: Buy the October 430/November 405 Put Diagonal for free.

Trade Idea 7: Buy the October/November 480 Call Calendar for $4.50.

#1 and #3 are straight directional downside this week. #2 is an alternative with margin for a lot less with risk below 395 and #6 plays for a quick move lower and stall or recovery. #5 and #7 play the upside and an expectation that the 480 level will hold this week. #4 goes for upside as well but takes margin and has risk over 480. in current environment I like #6 and #7 together, or #3 and #5 together (#2 and #4 if you have the margin and can hedge).

Goldman Sachs, $GS
gs

Goldman Sachs, $GS, broke the rising trend line last week and moved lower. Today it gapped below a support/resistance zone and is proving it important as it tries to recover. The Hammer building could be a reversal if confirmed tomorrow. Since September it has also traced a bullish Bat harmonic that completed today. The first target to the upside would be 178.73 and then 182.85. Heading into earnings the Relative Strength Index (RSI) has moved into the bearish zone and is falling with a falling MACD. These suggest the downside is not over yet. There is support lower at 172.25 and 169.25 followed by 168 and a gap to fill to 165.14 before 162. There is resistance higher at 178.75 and 180.50 followed by 183 and 186.65 before the prior top at 189.50. The reaction to the last 6 earnings reports has been a move of about 1.52% on average or $2.66 making for an expected range of 172 to 177.60. The at-the money October Straddles suggest a larger $5.25 move by Expiry with Implied Volatility at 43% above the November at 27%. Short interest is low at 2%. Open interest favors the 180 Strike this week. There were buyers of 185 Calls and seller of the 180 Puts yesterday. Today is seeing more Put selling at 180.

Trade Idea 1: Buy the October 175/180 Call Spread for $2.

Trade Idea 2: Buy the October/November 180 Call Calendar for $3.15.

Trade Idea 3: Sell the October/November 170 Put Calendar for a $3 credit.

Trade Idea 4: Buy the October 31 Expiry 175/180 Call Spread ($2.80) and sell the October/October 31 Expiry 165 Put Calendar ($1.30) for $1.50.

#1 and #2 are straight upside recovery plays, with #2 giving it much more time. #3 plays for short term downside and then recovery, and I like ti paired with #2. #4 looks for upside over two weeks but allows for short term downside this week, with risk under 165. I like #2 and #3 together best and then #4.

These were sent to subscribers at noon and opened to the public at 3pm. Also I have positions in Goldman Sachs (November/January Call Calendars) and will not be playing it for earnings.

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Stock Repair Strategy for Johnson & Johnson

First, let me say in no way am I calling a bottom on this pullback. It may be or it may not be. But at some point prices will stop falling and if you are long term investor or even just a position trader you will be looking at how to ‘get out of the hole’. One way to do that with the stocks in your account that have weathered the pullback is through a stock repair strategy. This is simply selling Covered Calls against your stock, but instead of pocketing the premium, using it to buy a Call Spread along side the stock. Let me illustrate with Johnson & Johnson.

jnj

The weekly chart for Johnson & Johnson shows it pulling back to the rising trend line and the possible support zone highlighted between 94.25 and 95.60. The company just reported good earnings and it is getting beat up anyway. It may stop at support and it may not. But if it were to stop, a possible strategy would be to sell the November 100 Covered Call (bid at $1.23 as I write this) and then also buy a November 97.5/100 Call Spread (offered at $1.25).

The net cost is basically zero without commissions. If the stock does not rise you lost nothing. If it rises only to 100 your position has increased in value to the equivalent of $102.50, from the extra $2.50 from the Call Spread. If the stock continues to rise and gets called away from you it is still a wining position until the price gets above 102.50. and you can always roll out the Covered Call later if you wish to continue to hold the stock.

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An Update on the German DAX

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Friday morning last week in The German DAX Cannot Fall Further  I wrote about the Head and Shoulders top in the DAX ($EWG) and how the target lower would measure to at least 7750. It broke the neckline lower before the ink was dry on the paper and headed south.  And you can see Angela Merkel’s reaction.  So rolling 4 trading days forward we see that the DAX is actually moving up? Huh?

dax

This is actually quite normal and does not negate the pattern. In fact it would take a move over the right shoulder at 9891.20 to negate it. The retrenchment after a breakdown lower is a natural profit taking or short covering. Technicians trading the short side of this would love to see the DAX retouch the neckline and then reverse lower, strengthening the breakdown. It would re-enforce where to put the stop loss, and much lower than the 9891 level.  Wednesday seems to be renewing the downward move.   The close is more important than the mid day price though.  Keep an eye on this bounce and be ready.

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Measuring the Head and Shoulders Top in Nova Measuring Instruments

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Nova Measuring Instruments provides metrology systems for thin film measurement that is used in chemical mechanical polishing and chemical vapor deposition applications. I have no idea what that means. But I do know that when I look at the chart of the stock price traders have not been so happy with the company lately. In fact the chart suggests it could get a lot worse soon.

nvmi

A Head and Shoulders top has appeared in the daily chart. To technicians, this pattern carries a price objective lower equal to the distance from the neckline to the top of the head. Using some of that metrology gives a price objective of at least 7.25. You can see that there may be some support that holds it at the 8.50 area from all that prior support in 2013. That is about halfway there from a break down under 9.75. The stock does not trade a lot of shares daily but it also has less than 1% short interest.  Technical analysis is never a given, but about possibilities, so wait for the trigger before trading this Head and Shoulders Top.

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What the Volatility Index is Saying About Sentiment

Traders and Investors have many ways to measure sentiment. There are surveys like the AAII and others, the CNN Fear/Greed Index, Put/Call ratios and any number of others. With the explosion in social media you can now also measure message volumes to get a sense either quantitatively or qualitatively.

These all have there limitations. Surveys and messages run the risk of mixed timeframes and investors not doing what they say they are doing. The quantitative measures may be better but who knows why someone bought a put or a call with today’s complex strategies.

One of my favorites though is the Volatility Index. It is not perfect either. In fact it seems kind of random in its design. Near month S&P 500 Put and Call activity is consolidated to create an average implied volatility for the S&P 500. As an exact measure of sentiment it is not very useful, but how and when it changes can give some interesting clues to sentiment.

vix

The daily chart of the Volatility Index ($VIX, $VXX) above has a lot to say about sentiment. I have written a lot in the past about the signals it has given over the past 2 years (labeled 1 - 14) of an impending new high in the S&P 500. But there is more there to see. Focus on the right hand side, and Monday’s spike. This is the highest the VIX has measured since June 2012. Everyone of those 14 peaks and the June 2012 high marked a low in the S&P 500. Will it happen again? Maybe.

This time became different from the last 14 when it went over 22, the high mark of the last two years. The era of low volatility may be ending. It could keep going higher, but the technical picture suggests if it does it will be short lived. The indicator that supports this is the RSI. At the top of the chart, the RSI does not like to remain over 70, in overbought territory. The combination of the spike and elevated RSI is what may let you sleep at night for the next few days. There may be more pain, but from history it should be short lived. If it is not short lived then things have changed.

vix w

Adding weight to the case is the weekly VIX chart. Going back to 2007, everytime the RSI on the weekly chart has touched that 70 overbought level the VIX has pulled back fast, except for one. That was in the volatility around the financial crisis. Has the economy or market changed enough to look like 2007-2008 again? Watch not just the VIX but the RSI on the VIX. It will tell you what the aggregate view is on the market.

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