Our index indicators are giving bullish to neutral readings, unchanged from last week. A key occurrence over the past week was that the Dow Jones rebounded off of its 200-day moving average and is moving back toward its 50-day average. Recall that the Dow was the weakest of the three major indexes last week, and it remains so this week. The S&P 500 and Nasdaq have both crossed back above their 50-day moving averages and have returned to primary bullish trends.
The bullish trends will remain in those trends as long as the S&P stays above 1,945, and the Nasdaq above 4,375. The Dow must cross back above its 50-day average, currently at 16,750, to join them.
Our internal indicators are somewhat confirming the renewed strength in the indexes, but not entirely. The 200-day Moving Averages Index is trending below its 50-day and 200-day moving averages for the second straight week. And, while the Advance/Decline Index has returned to a bullish trend, the Cumulative Volume Index has not. Six of the nine major S&P sector funds have returned to bullish trends (none were bullish a week ago), but it is noteworthy that the two that haven’t are the economically-sensitive Energy and Industrials funds, along with Utilities.
Predictably, volatility indexes are falling again along with the improvement in stock indexes.
As calm returns to the stock market and the S&P stabilizes, it is also returning to the bond markets.Treasury bonds (TLT) continue to confound those who have been expecting interest rates to rise this year. TLT is in a primary bullish trend and will remain so by staying above $113.90. Meanwhile, junk bonds looked to be breaking down, as many also expect will happen this year, but have rebounded sharply over the past couple of weeks. The U.S. dollar has treaded water over the past couple weeks, but the strong upswing it began in early July remains in place.
Commodities are reflecting the weakness evident in the S&P Energy and Industrials sector funds. Copper continues to trade below its 50-day moving average and looks like it is headed back down to its 200-day average. Oil is continuing the downfall that began in late June. Both copper and oil are seen as economically-sensitive. Gold continues to show some resiliency, but underlying stochastic indicators suggest that a breakdown could be coming there as well.
With stock indexes, including the S&P, regaining some momentum, options traders should weight toward a neutral balance between calls and puts. Low trading volume in August continues, and September and October do not carry good reputations for stocks, so the potential for some sudden and sharp selloffs remains in place.
My system identified a call option opportunity in an Asian ETF: the iShares South Korea Fund (EWY).
Buy the EWY Oct 68 Call options at $1.20 or lower (EWY is currently trading around $66.50 as of this writing). After entry, take profits if EWY hits $69.20 or the option hits $2.50. Exit if EWY closes below $65.20.
Remember, my analysis targets short-term moves only (three weeks or less), so this is not a recommendation to go long the fund or jump into the S&P. Rather, my mix of technical analysis and price valuation shows that call options in EWY are undervalued, and so a positive move in EWY should offer traders an exaggerated return in the calls.
Keep your positions small as the bulls and bears duke it out; there will be plenty of time to bet big when summer volatility passes and my indicators give the all-clear.
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