Major stock market indexes lost some momentum over the past week, but most of our indicators remain bullish. Our index indicators are giving bullish to neutral readings, a slight downgrade from last week’s bullish readings. However, unlike past instances when it was the Dow Industrials causing the slip, this time it is due to the Nasdaq falling below its 50-day moving average.
The Nasdaq has been the most consistent of the three major stock market indexes, so this slip bears watching. It needs to rebound back above 4,220 to return to a primary bullish trend. Meanwhile, the Dow needs to stay above 16,180 and the S&P 500 must remain above 1,840 for those indexes to maintain their bullish trends.
Our internal indicators continue to support the overall bullish trend. The 200-day Moving Averages Index, Advance/Decline Index and Cumulative Volume Index internal indicators are bullish, as are the Dow Transport and Dow Utility Averages. However, seven of nine S&P sector funds are bullish, down from nine of nine last week, as the Consumer Discretionary and Industrials sectors have fallen below their 50-day moving averages. As with the major indexes, this is something worth watching, but not something to get overly concerned about, as U.S. economic numbers should improve with better weather conditions.
One asset class that is not expecting economic improvement in the near future is long-term Treasury bond prices (TLT), which have rallied strongly over the past week and have finally broken above resistance at $109. This is a somewhat curious move — not that the move itself has happened — but the strength with which it has done so. The bullish trend for Treasury bonds will remain in place as long as TLT stays above $108. Interest rates move in the opposite direction of bond prices, so bond traders are betting on lower U.S. interest rates, at least over the near term.
Commodity prices are corroborating the strength in bonds by remaining mostly in bearish trends. Copper (CU) has been trying to rally, but remains in a primary bearish trend and must move above $21.75 before showing signs of a trend change. Following a nice rally that began in December, the Gold ETF (GLD) has collapsed over the past couple weeks. Only the U.S. Oil ETF (USO), which has bounced back into a bullish trend, is showing positive momentum. So, according to commodity traders, neither strong economic growth nor inflation are on the world’s immediate doorstep.
With our indicators slipping slightly from bullish territory, options traders should continue to buy a combination of calls and puts. Although we are about to enter the first week of a new month, which is generally a bullish time frame, the charts are saying that bullish momentum might be waning a bit.
With that in mind, I have a put options play in Honda Motors (HMC) for you to take advantage of the current stock market.
Recommendation: With HMC shares at $34.60, buy the HMC May 35 Puts at $1.50 or lower. After entry, take profits if the stock price hits $32.10 or the option price hits $3.20. Exit if the stock price closes above $35.80 or the option price closes below 90 cents.
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