Major stock indexes continue to trend higher, but something sinister may be lurking beneath the surface. Our index indicators continue to give bullish to neutral readings, unchanged from a week ago. The Dow Industrials and S&P 500 remain above their 50-day moving averages, but the Nasdaq continues to trend below its 50-day average.
However, the Nasdaq may be about to move back above its 50-day average at 4,160, and at the same time also break out of its current “lower highs, lower lows” bearish trading pattern. Meanwhile the Dow must stay above 16,340, and the S&P 500 above 1,860, to maintain their primary bullish trends.
Our internal indicators continue to lean to the bullish side, as the 200-day Moving Averages Index, Advance/Decline Index and Cumulative Volume Index remain bullish. Eight of nine S&P sector funds are bullish, and the Dow Transports and Dow Utilities are also bullish.
Long-term Treasury bonds (TLT) continue to be in one of the most powerful bull markets of all asset classes. TLT has broken to a new 10-month high and shows no signs of letting up. If it does pause or pull back, its primary bullish trend will remain in force as long as TLT stays above its 50-day moving average at $109. Higher bond prices, of course, mean lower interest rates, so TLT has been an ongoing signal that professional traders do not think economic growth is strong enough for the Fed to begin raising interest rates any time soon.
Validating the Treasury bond outlook, key commodities look to be rolling over. Oil made a double top and has now fallen back below its 50-day moving average. It looks like it will keep falling until it reaches its 200-day moving average. Copper remains in a neutral to bearish trend and is showing no signs of breaking out of a months-long trading channel. Gold remains in a primary bearish trend and is in danger of falling into another meltdown. So, not only are Treasury bonds saying that faster economic growth isn’t going to happen soon, combined with commodity trends, the specter of deflation is once again rearing its ugly head.
With our index indicators remaining bullish to neutral, options traders should continue to carry a neutral weighting between bullish and bearish positions. Bullish in the event that Fed monetary policy can continue to prop up the markets and economy, and bearish in the event that signals coming out of the bond and commodity markets prove to be right.
For those looking to take a bullish stance, it pays to trade selectively and focus on names with proven strength. Micron Technology (MU) is one of the most closely watched stocks out there, and after being hit hard in the recent tech sell-off, it’s rebounding nicely on another positive earnings report.
Today’s recommendation is to take advantage of this by buying the MU Jun 28 Calls at $0.90 or lower. After entry, take profits if the stock price hits $28.80 or the option price hits $2.20. Exit if the stock price closes below $24.90 or the option price closes below $0.50.
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