by Ken Trester | August 8, 2014 7:59 am
Our index indicators are giving bullish to neutral readings, a downgrade from the bullish readings of a couple weeks ago. While all three major indexes are giving this reading, there is a divergence as the Dow is actually threatening to fall below its 200-day moving average, while the Nasdaq has barely fallen below its 50-day average. Nevertheless, the 200-day moving averages are now key support levels for the indexes.
For the Dow, that support level is currently at 16,300, for the S&P 500, 1860, and the Nasdaq, 4150. As we mentioned, only the Dow is in immediate danger of breaking below support. But in what may be an omen, the Russell 2000 Index Fund (IWM) has already fallen below its 200-day average. IWM fell below its 50-day average a couple weeks in advance of the major averages doing so.
Our internal indicators are confirming the recent weakness displayed by the indexes. Most important is the 200-day Moving Averages Index is trending below both its 50-day and 200-day moving averages. This indicator has a history of being a very good “early warning” indicator that should not be ignored even though it may give off some false signals every now and then.
The Advance/Decline Index and Cumulative Volume Index have also fallen below their 50-day moving averages. All nine major S&P sector funds have fallen below their 50-day averages, and the Utilities Fund has also fallen below its 200-day average. And volatility indexes have moved higher off of recent historically low levels.
While the S&P Utilities Fund falling below its 200-day moving average might be looked at as a sign of impending higher interest rates, that threat is not being seen in Treasury bonds (TLT). Following a few weeks of relative weakness during June and early July, TLT has resumed the relentless march higher it began in January. It is in a primary bullish trend and will remain so by staying above $113.50. The U.S. dollar (UUP) is reflecting the strength in Treasuries.
Commodities are painting a mixed outlook, though the outlook can easily be taken as one of impending trouble. Copper (CU) continues its pullback and has fallen below its 50-day moving average. Oil (USO) has fallen below not only its 50-day average but its also its 200-day moving average. Both CU and USO are economically-sensitive. Gold (GLD) is showing some resiliency, but that is most likely due to geopolitical difficulties rather than increasing inflation. Higher inflation can be a result of increasing economic growth.
With stock indexes weakening substantially and teetering on their support levels, options traders should weight more toward bearish positions. Low trading volume in August, combined with the bad reputations that both September and October hold for stocks, have the potential to result in some sudden and sharp sell offs.
My analysis uncovered a short-term put option candidate. Business software and service provider Cognizant Technology Solutions (CTSH) might have a solid longer-term outlook, but my system identified its technical weakness in the near-term. I recommend buying a put option on CTSH, and we shouldn’t have to wait long. My analysis pinpoints moves that are expected to occur within a three-week timeframe.
Buy the CTSH Oct 42.5 Put options at $1.20 or lower (The stock price closed at $44.40 on Thursday). After entry, take profits if CTSH shares hit $41.20, which is below its support level (or the option price hits $2.70). Exit if the stock price closes above 46.00.
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