The Dow Industrials continued to struggle in Thursday’s trading, while smaller stocks marched ahead. So far, the indicators are saying that the move by the small-caps is one to be believed.
Our index indicators continue to give bullish readings, unchanged from last week, despite the ongoing consolidation of the market in general and the Dow Jones in particular. In fact, the Dow is close to falling below its 50-day moving average, which if it happens would represent the first major dent in the bull market. Right now, that 50-day average is at 16,150. On the other hand, the S&P 500 and Nasdaq have stayed in more comfortable bullish tends. The S&P 500′s 50-day moving average is at 1,810, and the Nasdaq’s is at 4,090.
As was the case last week, our internal indicators are painting a more bullish picture than the Dow. The Advance/Decline Index and Cumulative Volume Index remain bullish. The 200-day Moving Averages Index is continuing to improve and briefly moved back above its own 200-day moving average before falling below it on Thursday. However, only five of the nine major S&P sector funds are bullish, down from seven of nine last week.
The big news continues to be centered on long-term Treasury bonds (TLT). Even in the face of the Fed scaling back its bond purchases, TLT has rallied substantially over the past few weeks. However, significant resistance waits at $108. Should TLT reach that level and fail to break through, the current rally would prove to only be a replay of the last year’s August-to-November time frame. Back then, TLT broke a sharp downtrend by trading to $108, only to fall back from there. Until TLT breaks above $108, the current move lower by interest rates will again be relatively short-lived.
With our indicators continuing in a bullish mode, but displaying some weakness, options traders should try to balance bullish and bearish positions. In fact, buying downside insurance by way of put options is more important now than it has been over the past year, as investors appear ready to keep cashing in profits.
My system uncovered a put play based on United Parcel Service (UPS). UPS is a major package delivery service. The stock had been in a strong uptrend until the start of the new year, and has been selling off since. It recently broke below its 50-day moving average and looks like it will continue heading lower. Here is the best way to play more weakness in United Parcel Servics:
Buy the UPS Mar 92.50 Puts at a suggested price of 80 cents or less ($80 per contract).
After taking the position, enter a good-til-cancelled contingent order to sell this option if the stock hits its target price of $94. That should give you an option price of about $1.90, for a 137% trading profit.
Close this position and cut losses if the stock closes above $99.90, when the option price should be about 50 cents. The stock is currently trading around $97.94.
Analysts expect negative growth for the company and the industry overall, and UPS reports earnings on Jan. 30. It has a history of flat to disappointing numbers, which doesn’t bode well in this very selective market, setting this put option up for profit.
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