by Ken Trester | April 11, 2014 9:32 am
Stocks have fallen into short-term bearish territory, and momentum indicators suggest that the selling may not be finished. However, the internal indicators are saying otherwise.
Our index indicators are giving bullish to neutral readings, a downgrade from last week’s bullish reading, as all three major indexes have fallen below their 50-day moving averages. For the bull market to resume, the Dow needs to move back above 16,250, the S&P 500 above 1,850 and the Nasdaq above 4,195. To avoid a more serious correction and possible outright bear market, the Dow must stay above its 200-day moving average at 15,730, the S&P 500 above 1,760, and the Nasdaq above 3,950.
Somewhat surprisingly, our internal indicators continue to paint a bullish picture, as the 200-day Moving Averages Index, Advance/Decline Index and Cumulative Volume Index internal indicators remain bullish, giving hope that the current volatility may be short-lived. But only three of nine S&P sector funds are bullish, a steep reversal from last week’s nine of nine, confirmation that short-term momentum has undoubtedly taken a turn for the worse.
Reflecting the weakness in the indexes, long-term Treasury bond prices (TLT) have returned to rally mode. After bouncing off its 50-day moving average last week, TLT has moved sharply higher and is re-establishing the “higher highs, higher lows” bullish chart pattern it has been carving out over the past couple of months. And while it has been doing this, its 50-day moving average has been coming ever closer to crossing back above its 200-day moving average. As we suggested last week, this would be a major reversal compared with the overwhelming bearishness with which bonds began the year.
In somewhat of a contrary move to bond prices, commodity prices are also improving. Oil continues to be the star of the sector, maintaining a primary bullish trend that will be in force as long as USO stays above its 50-day moving average at $36. Copper has moved back above its 200-day moving average, although a pullback on Thursday puts that cross in jeopardy, and gold has reversed a sharp downtrend by bouncing back above its 50-day moving average. Both copper and gold remain in primary bearish trends, but their recent improvement suggests that maybe things aren’t as bad as the rally in Treasury bonds suggests.
With our index indicators falling into short-term bearish postures, options traders should lean more heavily toward bearish positions such as buying puts. Downward momentum has a way of gathering steam much quicker that upward momentum.
Today I am recommending a bearish trade on networking-device company Juniper Networks (JNPR) to take advantage of this situation. The stock made a double top at $28 in February and has been declining since then. It recently fell below its 50-day moving average and also fell through additional support in the $25 area, setting up a possible move much lower. Here is the best way to play more weakness in Juniper Networks:
Buy the JNPR July $24 Puts at $1.20 or lower. After entry, take profits if the stock price hits $23.10. That should give you an option price of about $2, for a 66% profit. Exit if the stock price closes above $25.80, when the option price should be about 90 cents. The stock is currently trading at $24.85.
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