by Ken Trester | January 3, 2014 10:06 am
Though stocks suffered a selloff on Thursday, the primary trends remain very bullish, which is good for option trading. Our index indicators are giving bullish readings, unchanged from two weeks ago. Thursday’s action can be viewed simply as a reaction to what transpired over the last two weeks of December, when stocks rallied strongly on low volume, and yesterday’s session was more or less some position squaring following that run-up.
The run-up has also brought the indexes to short-term overbought stochastic levels, so any brief pullback should be viewed as a healthy move. That means the 50-day moving average support levels may come into play if a brief pullback becomes more extended. 50-day moving average support sits at 15,960 for the Dow, 1,790 for the S&P 500 and 4,010 for the Nasdaq.
Our internal indicators have also improved. The Advance/Decline Index and Cumulative Volume Index are bullish. And the 200-day Moving Averages Index has moved back above its 50-day moving average, although both the price and average remain below the index’s 200-day moving average. And eight of nine S&P sector funds are bullish.
Long-term Treasury bonds (TLT) continue to struggle, as would be expected in an environment of improving economic numbers and reduced bond purchases by the Fed beginning this month. TLT continues to hover just above key support at $102, while also continuing its bearish chart pattern of lower highs. A major story over the coming year will be selling activity and price movement in Treasury and other bonds, and the effect that resulting higher interest rates have on the economy. (View an option trading recommendation for TLT here).
With our indicators in bullish mode, options traders should favor bullish positions over bearish ones. That primarily means buying more calls.
Buy the Sprint (S) Feb 11 Call options at 63 cents or less. After entry, take profits if Sprint stock price hits $11.90 or the option price hits $1.50. Exit if the stock price closes below $9.70 or the option price closes below 40 cents.
Sprint is scheduled to report earnings at the beginning of February, but with my three-week maximum holding time, I recommend that you exit before then. If an option hasn’t hit its target within three weeks, in my four decades of trading I’ve found that it becomes less likely that it will.
While my system identified Sprint as a solid bullish near-term option trading play, also continue to hold some puts, especially over the immediate short term, as overbought stochastic conditions prevail in the major stock indexes.
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