by Ken Trester | January 31, 2014 9:19 am
Our index indicators are giving bullish to neutral readings, a downgrade from last week[1]. But even though some weakening has occurred in the stock market, conditions are looking better. The Nasdaq remains in a primary bullish trend, and the Dow and S&P 500 — during the course of their downtrend over the past few weeks — are now becoming oversold on a stochastic basis. Also, the Dow Transportation Average and Dow Utility Average are both bullish, which from a Dow Theory standpoint suggests that the bull market remains intact and the recent selling in the Dow Industrials has been overdone.
Our internal indicators also reflect a bullish to neutral market stance. The Advance/Decline Index is bullish, the Cumulative Volume Index has fallen from bullish to neutral, and the 200-day Moving Averages Index is bearish. However, only two of the nine major S&P sector funds are bullish, so vigilance must be maintained. Key short-term chart support for the Dow is at 15,730, and for the S&P 500, 1,775. The Nasdaq remains above its 50-day moving average support at 4,085. Also on the positive side, the coming week is the first week of a new month, which generally brings a bullish bias.
Long-term Treasury bonds (TLT[2]) have been the immediate beneficiaries of the current market volatility, not a surprise given that the volatility has largely been an outgrowth of emerging market currency fears. For the past few weeks, the risk-off trade has been in vogue, thus the rally in TLT. By the numbers, TLT reached the $108 resistance we’ve been mentioning, and pulled back upon its first contact. But the Treasury trade right now is largely an emotional one, so more fear pouring out of the stock market will benefit Treasuries. However, should stocks find calmer waters, Treasury prices will recede and interest rates will drift slightly higher.
With our indicators weakening slightly, options traders should continue to balance bullish and bearish positions. While the longer-term outlook remains bullish, a shorter-term spate of more selling cannot be ruled out.
I’ve got a big-cap tech stock that disappointed analysts last quarter and may see some pullback running into its earnings in early March: Ciena Corp. (CIEN[3]). It’s a cheap option that’s an easy way to get some selective downside exposure to this stock market.
Buy the CIEN March 22 Puts at $1 or lower. The stock closed Thursday at $23.50. After entry, take profits if the stock price hits $20.90 or the option price hits $2.10 for better than double your money.
Exit if the stock price closes above $24.70 or the option price closes below 60 cents.
My system has pegged similar stocks, like Cisco (CSCO[4]) as weak in the near-term, which bodes well for this bearish bet. The difference between CIEN and CSCO, though, is that this put option in CIEN is undervalued – and, therefore, inexpensive and a better play.
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