Stocks struggled Thursday as they continue their sluggish start to the new year. However, our index indicators continue to give bullish readings, which is unchanged from last week. And even with the general lack of momentum we’ve seen over the first few days of 2014, the indices remain comfortably above their 50-day moving average support levels. Until those supports are broken, the bull market can be considered to be intact and options traders should continue holding their bullish positions. For the Dow Industrials, its 50-day moving average is at 16,050, for the S&P 500 it sits at 1,800, and for the Nasdaq the level is 4,035.
Our internal indicators support the idea that the lack of momentum so far is just a temporary lull resulting from overbought stochastics, not a sign of major weakness. The Advance/Decline Index and Cumulative Volume Index are bullish. And the 200-day Moving Averages Index has remained above its 50-day moving average, although both the price and average remain below the index’s 200-day moving average. Additionally, only seven of nine S&P sector funds are now bullish, a decline from eight of nine last week.
Long-term Treasury bonds (TLT) continue to struggle, but are trying to find some equilibrium. Support for TLT has been holding in the key $102 area, but it remains in a primary bearish trend relative to its key moving averages. TLT must break above $103.60 to possibly reverse its downtrend. Weak bond prices of course translate into rising interest rates. However, a still struggling global economy, no signs at all of runaway inflation and a Fed ready and willing to keep the money pump primed make a solid argument for interest rates to remain within their current range.
With our indicators in bullish mode, and with momentum stalling, options traders should look to balance bullish and bearish positions.
My scans have uncovered Oracle (ORCL) as a bullish play now that the stock has moved past its resistance. Additionally, 11 analysts have revised their EPS estimates for the stock in the past 30 days.
While my system rates Oracle’s competitors significantly lower – Microsoft (MSFT) is on a “sell watch” with dismal short- and intermediate-term prospects and CA Technologies (CA) is merely “emerging” – ORCL is a “powerhouse” stock with excellent short- and mid-term outlooks. It’s a great time to put on a call option.
Recommendation: Buy ORCL Mar 39 Call options at 80 cents or lower. After entry, take profits if the stock price hits $39.70 or the option price hits $1.70. Exit if the stock price closes below $36.70 or the option price closes below 50 cents.
Remember, successful options trading is all about allocation. If you have already established a sizeable trading portfolio, I recommend you invest no more than 10% of your total portfolio value into options. With you capital, I strongly recommended that you always allocate an equal portion of your capital to each of our recommendations, regardless of the size of the portfolio.
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