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Tuesday, March 22nd, 2011
7:50am (EST)
Every bull and bear market is different and when those trends are in place, option trading can be like catching fish in a barrel. Usually, the upside in bull markets can be extreme with explosive moves that shoot way past resistance levels. The same is true for bear markets as most investors panic and head for the exits. However, most investors don’t like shorting stocks because they don’t understand how put options work or the don’t get the concept of shorting. Using put options in bear markets can make you the same triple-digit returns as call options in bull markets so remember this down the road for those of you who don’t understand this strategy.
When bulls and bear markets correct or reverse course, there is usually a “trading range” that occurs following the explosive run higher or lower. These trading ranges can be hectic, confusing, nerve-racking, and can cause you a lot of sleepless nights and hours and hours or more research.
Geopolitical events, oil, natural disasters, and war can also cause markets to fluctuate. If you combine a trading range with these events, it makes it even more frustrating because volatility can also rise. However, it is important to remember that there will be a breakout or breakdown and this is when you will need to be ready. Yes, certain option trades will work in trading ranges but for the most part its best to limit your exposure and be patient.
Although we were encouraged by yesterday’s rally, there were some things we liked and some things we didn’t like.
The Dow managed to close above 12,000 by adding 178 points, or 1.5%, to finish at 12,036. The index traded up to 12,078 and the close above 12K looked pretty but the blue-chips are going to need some help.
The S&P 500 gained 19 points, or 1.5%, and settled at 1,298 after kissing 1,300.58 intraday. We were looking for a close above this level to 1,305 with the powerful open but once again the bulls were denied.
The Nasdaq also fell short of our expectations but finished with the biggest percentage gain by adding 48 points, or 1.8%, and closed at 2,692. The index traded to a high of 2,699 and we were looking for a close above 2,700.
So basically, we got one plus and two negatives. If we throw in the Financial stocks, we get another negative as many of them started off strong but faded for much of the day. This is the one sector the bulls need to participate this time around so we need to watch this action carefully.
Stocks get stuck in trading ranges along with the market and many of the potential trades on our Watch List are showing this. The good news is that we have pinpointed support and resistance so our targets are clear. We just have to wait for confirmation.
We are still in a bullish trend but we know it’s rare for markets to make a “V” off the bottom. Last week the S&P traded to a low of 1,249 and was down 55 points from the previous Friday’s close of 1,304. (Now you see why we wanted a close at 1,305+).
Since then, the index has made back the majority of those losses and has formed the perfect “V” in less than a week. However, like we said, Volatility can be hard to predict inside trading ranges so this could be the start of another leg up if the bulls can keep the momentum on their side.
Tags: Citigroup, NYSE: C, reverse stock splits, straddle and strangle option trades
Posted in Financial Stocks, Market Commentary | Comments Off
Sunday, July 18th, 2010
Another Battle Begins
11:00pm (EST)
Earnings season officially got underway last week and so far it favors the bears going forward. There were a number of “surprises”, some good/ some bad, but the overall theme is companies are having no problems beating lowered expectations but they aren’t doing Jack with growing their revenues. We covered quite a few companies last week so we will look at who said what on Friday.
The market plunged on the last day of the week on disappointing economic data and from the Financial sector which was blasted for a loss of 3%. The bears were punishing the market right from the open and continued to pour it on after hearing the Reuters/University of Michigan consumer confidence index report. The index fell to 66.5 in July, down from 76 in June. Needless to say, Wall Street’s pencil pushers did not figure a 9.5 point drop and the bears used it as extra ammo.
Elsewhere, the Labor Department chimed in and said the seasonally-adjusted Consumer Price Index slid 0.1% in June. Core consumer prices were up 0.2%. In May, consumer prices were down 0.2%.
Turning to earnings, Bank of America (BAC, $13.98, down $1.41) and Citigroup (C, $3.90, down $0.26) tanked 9% and 6%, respectively. Both companies posted better-than-expected earnings per share but revenue fell short of expectations.
Bank of America reported a profit of $3.1 billion, or $0.27 a share, versus $3.2 billion, or $0.33 a share, in the year earlier period. The Street was expecting $0.22 a share. Revenue came in at $29.5 while analysts were expecting $29.8 billion.
Citigroup said its earnings were $2.7 billion, or $0.09 a share, compared to $4.3 billion, or $0.49 a share in last year’s quarter. Analysts had estimates of $0.05 cents a share. Revenue was $22.1 billion which was slightly below the $22.2 billion call.
We mentioned in our 1pm update on Friday when the market was down about 2% we could see more selling pressure and a possible 3% clip. On average, we were close. The Dow fell 261 points, or 2.5%, to settle at 10,097 and below its 10 and 20-day moving averages (MA). For the week, the index dropped 100 points, or 1%, and could not bust through the 10,400 level.
The S&P 500 plunged 32 points, or 2.9%, to settle at 1,064 and below its 50-day MA. The index was unable to penetrate the 1,100 level which is looking like a concrete wall. For the week, the index declined 13 points, or 1.2%.
The Nasdaq suffered the worst losses as it got hammered for 70 points, or 3.1%, to finish at 2,179. The Tech-rich index was down 17 points, or 0.8%, for the five trading days but the 200-day MA of 2,250 will likely keep the bulls in check over the near-term.
Downside targets in play this week will be Dow 10,000 then 9,800. The S&P could be headed for a break below 1,050 which could lead to 1,020. Meanwhile, watch for the Nasdaq to test 2,150 then 2,050. If these levels fail once again then we could finally see the bears do some real damage.
Looking ahead to this week, there will be an overload of earnings news and we could get aggressive on our trades as we see a number of opportunities to go short this market. We know this trading range has been tough for a lot of investors but we strongly feel another test to the downside is imminent.
Two keys things we are watching that will keep the bulls at bay are the Financials, which look nasty right now, and what is revealed in Europe’s bank stress tests this week.
At some point in 2010, we can see a breakout to the upside for the market but we think a “cleansing” is still needed before investors feel like they are getting a bargain on stocks. (Although Bank of America looks interesting at $14 right now).
We will be back in the morning with a full update on the companies reporting and maybe a possible trade or two.
Tags: bac, Bank of America, c, call options, Citigroup, how to trade options, momentum options trading, Momentum stocks, option picks, option stock picks, options alerts, options newsletter, options track record, put options, stock options trading, volatile options
Posted in Earnings, Market Analysis, Market Commentary, Weekly Wrap | Comments Off
Wednesday, June 30th, 2010
9:00am (EST)
Like a good UFC fight, the bears finally landed the blow we were all waiting to see.
Before we talk about the market, we would like to talk about the emotional stress that comes with option trading. Sometimes it is hard to see the forest through the trees, and we know it has been a rough couple of weeks for many of you as you watched the market move higher last week.
Now, before we get in today’s lesson on “psychology 101″, we want to make something clear. We are not always right. We have losing trades. Again, we have losing trades. However, our overall goal is to win 70% of our trades on a yearly basis. We will get hot, and we will get cold.
The point we want to make is that option trading is harder than stock picking because options are time sensitive. Often times, we can nail a stock’s direction because we still use fundamental analysis and vision, however, when trading options, you are allowed a smaller window because of the time frame.
We also have an uncanny ability to pick the market’s direction as many of you know. Half of the battle with options is getting on the right side of the market with the options you do have. Naturally, if you owned call options yesterday, they got hammered. You will also have times where the market is volatile and NOT trending which means you have to change your strategies.
This may mean that you will have to use your “gut” feeling as to how long to keep a position open and believe in your original analysis no matter how stupid the market is making you look. We were bullish ALL year until May 5th which is when we started recommending put options. We could see a trend developing, but the volatility has made the trend harder to read. It is that simple folks.
We have been “expecting” a market correction and on June 11 we had this to say:
“Men who can both be right and sit tight are uncommon.” – Jesse Livermore
We used today’s quote for those of you who might be nervous in this kind of market environment. As option traders our job is to speculate on where we think the market is headed and what trades to choose to benefit from the move – up or down.
We have made it no secret that we are expecting a correction, and we have positioned ourselves in the bearish camp (for now). We still think the back half of 2010 will be outstanding as far as the market moving higher, but as traders, we have trained ourselves not to be bullish or bearish. Instead, we look for opportunities when there is volatility and chaos in the market place. We have that right now.
Still, having a trading plan helps to eliminate all of the emotions of not getting nervous about holding your positions. This can be hard when you have a trade that is up 60% one day and then see it at a 17% gain the next day after the market moves against you. Or one that was up 10% is now down 20%. Folks, this is the nature of options and it happens, but the real money is made by staying the course.” (END)
Back to today’s lesson.
You will see “losing streaks” if you look over our three-year track record, and those are the times when the market stayed flat or we got the direction wrong. Some of you asked us how we could sit back and keep recommending put options at the start of June when the market was going up.
Well, we could still be wrong about a further correction, so let’s get that straight. But, with every trade we make, we PLAN for the worst and HOPE for the best. Sounds crazy, but it keeps us in check.
The market owes us nothing, and it can humble you on occasions, but you still have to battle. Which is what we do every day with the bulls and the bears…
The market got crushed yesterday, but all the talking heads were blaming it on a weak consumer confidence number. Folks, it wasn’t just one number, it has been a number of things that has made this market nervous.
Here was another clue we gave you on why we might be headed for a correction. On June 10, our 1pm update was titled “Circuit Breakers Could Be an Omen.”
On Tuesday, the market got the chance to test out its new shiny toys as shares of Citigroup (C, $3.73, down $0.27) were falling off a cliff. Trading in the bank was halted for five minutes while the panic subsided.
The circuit breakers are designed to stop the bleeding of a stock when it drops 10% in a 5-minute period. If they trigger, shares would be halted for 5 minutes to get some liquidity on the buy side.
The end result was a blood bath for the market.
The Dow was hammered for a 268 point loss, or 2.7%, and finished at 9,870. It didn’t take 10,000 long to fall as the index hit 9,999 within 3 minutes of the opening bell. The bulls tried to hold the levy but the flood was too much as the Dow sank to a low of 9,811 for the day. We pegged 9,800 and said a drop below this level could lead to 9,500 so we shall see.
The S&P 500 followed suit and was hit for a 33 point loss, or 3.1%, as it finished at 1,041 for the day. A couple of key points: First, we were watching for the 1,050 level to fall and mentioned that 1,040 would come into play. Second, everybody and their brothers are watching this level and the index traded to a low of 1,035. However, as you can see, we closed above 1,040 which will give the last remaining bulls hope, but the damage is already done.
The Nasdaq was punished the hardest as it fell a staggering 85 points, or 3.9%, to close at 2,135. It was the index’s lowest close since early February. We penciled in 2,150 as the first wave of support and the close below this level isn’t a good sign. The low for Tuesday was 2,122 and our next target is 2,050. A break below here would not be a good sign either.
There are a number of stocks we want to discuss this morning and a couple of them we will point out as ”trades gone bad” because we did have the “timing” wrong and it is part of today’s lesson.
Garmin (GRMN, $29.26, down $1.34) finally dropped below $30 and we have been talking about this dying business for a while. It’s not that the company doesn’t make great products, they do. Other companies are just making their concept cheaper. Garmin has also entered the smart-phone business too late. We doubt there were lines at the stores when they made the splash into this highly competitive market.
In April, we went with the May 32 put options for a buck and got our head handed to us as the stock stayed above $30. Right on direction, wrong on timing.
In late May, we got aggressive and bought the June 25 put options on Wells Fargo (WFC, $25.93, down $1.10) after it broke its 200-day moving average and fell below $30. We looked at the charts, found support, and knew shares were headed to $25. The options expired in less than 3 weeks. Well, the market rallied off then support levels and Wells Fargo went along for the ride until yesterday. Right on direction, wrong on timing.
If we had bought the July 25 puts for Wells Fargo we would still be in the trade and looking good in the ‘hood.
Folks, we didn’t go “all-in” at the start of June; we started “building” positions.
We know we have been long-winded this morning but we felt it was important to explain the ups and downs of the market and to put our “long-term” trading plan in perspective for you.
Trending markets are easy. Volatile and choppy markets take hours a day to study, but the charts still tell a story.
We have a lot to cover in our Members Area this morning, but for those of you who are nervous about the market or are thinking of getting out, don’t. You can make the same gains on the downside as you do on a market going up.
We spend a lot of hours doing the research for you, and we mean a lot of hours. Success is often dependent on how many hours you put into your research, and the results of your trading business or portfolio are reflective of those long hours.
If anybody tells you any different that hard work and long hours aren’t part of trading then they have no clue on how hard it is to read the market at times.
As we head to press, the Dow futures are showing a pop of 11 points to 9,808 while the S&P 500 futures are up by 2 points to 1,036. The Nasdaq 100 futures are also higher by 2 points to 1,766.
Overtime is calling…subscribers, check for the updates.
Tags: c, Citigroup, momentum options trading, NYSE circuit breakers, option picks, options alerts, stock options trading, Wells Fargo, wfc
Posted in Financial Stocks, Hot Stocks, Market Commentary, Trading Psychology | Comments Off
Monday, April 26th, 2010
1:00pm (EST)
The bulls have gotten off to another good start and appear ready to challenge our short-term targets we discussed in Sunday’s Weekly Wrap.
We mentioned the solid earnings report from Caterpillar (CAT, $71.91, up $3.13) this morning but Whirlpool (WHR, $116.38, up $14.16) absolutely crushed it and knocked their earnings out of the park.
The company announced earnings of $164 million, or $2.13 a share, up from $68 million, or $0.91 a share, in the year earlier period. Revenue came in at $4.3 billion, up 20%. Analysts had predicted a profit of $1.33 a share on $3.8 billion in sales.
The key to Whirlpool’s 14% pop was also the fact that they raised their outlook and now expect earnings of $8.00-$8.50 a share for the full-year, up from its previous outlook of $6.50-$7.00 a share and above the average analyst estimate of $7.08.
Elsewhere, the Treasury Department said it would sell 1.5 million, or about 20%, of the common stock it holds in Citigroup (C, $4.68, down $0.18). Shares recently traded above $5 and we think Citigroup is a great buy at these levels if you have a two-year time horizon.
The looming financial overhaul regulations could hurt the Financial stocks over the short-term but longer-term many of these names are still undervalued.
As we head to press, the Dow was up 28 points to 11,232 but has traded as high as 11,258. The S&P 500 is down a point to 1,216 while the Nasdaq is off 3 points to 2,528.
We released a NEW TRADE this morning and we have another one lined up for our 1pm update. We like the way the market is acting and we want to take advantage of a quick earnings trade.
Tags: c, Citigroup, option picks, option signals, options alerts, stock options trading, Whirlpool earnings, WHR
Posted in Company Commentary, Earnings, Market Analysis, Market Commentary | Comments Off
Tuesday, December 15th, 2009
9:00am (EST)
The bulls got some good news yesterday in the form of the Dubai $10 billion “bailout” package and the Dow’s advance could have been more if Exxon Mobil (XOM, $69.69, down $3.14) didn’t drop 4%. The company said it would acquire XTO Energy (XTO, $47.86, up $6.37) for $30 billion or so and Exxon’s Dow impact accounted for 23 negative points.
Still, the Dow rose 29 points to close at 10,501, its highest close since October 1st, 2008. The S&P 500 added 7 points and closed at 1,114, while the Nasdaq gained 21 to finish at 2,212.
We would love to see Exxon drop to $66-$67 this week or next.
The Financial sector got a small lift after Citigroup (C, $3.70, down $0.25) said it would repay the $20 billion of the $45 billion it received last year from the government’s bailout package. Citigroup tanked of course, but JPMorgan (JPM, $41.77, up $0.81), Goldman Sachs (GS, $166.10, up $0.10) and Morgan Stanley (MS, $30.17, up $0.39) got small pops. Note: The government also will sell its 35% stake in Citigroup.
Wells Fargo (WFC, $25.49, up $0.08) must have felt left out because after the bell yesterday they announced they were repaying $25 billion. Both Citigroup and Wells have followed Bank of America’s (BAC, $15.63, flat) lead as they recently announced they were repaying the $45 billion in bailout money it owed taxpayers.
Well, well, well…Apollo Group (APOL, $62.06, up $5.48) has agreed to settle a lawsuit over how it paid recruiters for its University of Phoenix subsidiary. The company said it expects to pay $80 million in the settlement. Wow! Somebody didn’t want somebody talking. We covered the firm’s shady practices and mentioned this “boiler room” atmosphere in our October 28th write-up “Apollo Group Has A Skeleton Or Two“.
Ahead of the opening bell, Dow futures are lower by 45 points to 10,392, while the S&P 500 futures are off 6 to 1,102. The Nasdaq futures are down 9 to 1,799. Stock futures got worse after the release of the producer price index report. The index increased 1.8% versus the expected increase of 0.8%.
Before we go, we continue to notice the gains in Imax (IMAX, $12.93, up $0.35) which hit another 52-week high yesterday. We have been pounding the table on this stock and we have been recommending different options trades on this one all year long. In case you haven’t heard, Avatar is opening up this Friday.
Tags: Apollo Group, call option trading, chicken option trades, Citigroup, Covered Calls, Exxon Mobil, Imax, JPMorgan, momentum stock option trading, option trade picks, option trading online, options blog, options mentoring, options newsletters, options track record, put option trading, Rick Rouse, stock option trade pick service, straddle option trades, strangle option trades, support and resistance levels, triple-digit option trades, XTO Energy
Posted in Economic News, Financial Stocks, Hot Stocks, Option Trades, Watch Lists | Comments Off
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A Lesson on V’s
Tuesday, March 22nd, 2011
7:50am (EST)
Every bull and bear market is different and when those trends are in place, option trading can be like catching fish in a barrel. Usually, the upside in bull markets can be extreme with explosive moves that shoot way past resistance levels. The same is true for bear markets as most investors panic and head for the exits. However, most investors don’t like shorting stocks because they don’t understand how put options work or the don’t get the concept of shorting. Using put options in bear markets can make you the same triple-digit returns as call options in bull markets so remember this down the road for those of you who don’t understand this strategy.
When bulls and bear markets correct or reverse course, there is usually a “trading range” that occurs following the explosive run higher or lower. These trading ranges can be hectic, confusing, nerve-racking, and can cause you a lot of sleepless nights and hours and hours or more research.
Geopolitical events, oil, natural disasters, and war can also cause markets to fluctuate. If you combine a trading range with these events, it makes it even more frustrating because volatility can also rise. However, it is important to remember that there will be a breakout or breakdown and this is when you will need to be ready. Yes, certain option trades will work in trading ranges but for the most part its best to limit your exposure and be patient.
Although we were encouraged by yesterday’s rally, there were some things we liked and some things we didn’t like.
The Dow managed to close above 12,000 by adding 178 points, or 1.5%, to finish at 12,036. The index traded up to 12,078 and the close above 12K looked pretty but the blue-chips are going to need some help.
The S&P 500 gained 19 points, or 1.5%, and settled at 1,298 after kissing 1,300.58 intraday. We were looking for a close above this level to 1,305 with the powerful open but once again the bulls were denied.
The Nasdaq also fell short of our expectations but finished with the biggest percentage gain by adding 48 points, or 1.8%, and closed at 2,692. The index traded to a high of 2,699 and we were looking for a close above 2,700.
So basically, we got one plus and two negatives. If we throw in the Financial stocks, we get another negative as many of them started off strong but faded for much of the day. This is the one sector the bulls need to participate this time around so we need to watch this action carefully.
Stocks get stuck in trading ranges along with the market and many of the potential trades on our Watch List are showing this. The good news is that we have pinpointed support and resistance so our targets are clear. We just have to wait for confirmation.
We are still in a bullish trend but we know it’s rare for markets to make a “V” off the bottom. Last week the S&P traded to a low of 1,249 and was down 55 points from the previous Friday’s close of 1,304. (Now you see why we wanted a close at 1,305+).
Since then, the index has made back the majority of those losses and has formed the perfect “V” in less than a week. However, like we said, Volatility can be hard to predict inside trading ranges so this could be the start of another leg up if the bulls can keep the momentum on their side.
Tags: Citigroup, NYSE: C, reverse stock splits, straddle and strangle option trades
Posted in Financial Stocks, Market Commentary | Comments Off