Trade of the Day: Baker Hughes (BHI)

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Stocks accelerated their sell-off over the past week and took out some key support along the way. Our index indicators are giving bearish to neutral readings, a large downgrade from last week’s bullish to neutral. But short-term readings have been bearish since the beginning of the month.

The major trend change is the due to the indexes falling below their 200-day moving averages, the first time in almost two years this has happened. Without significant moving average support, it is anybody’s guess when the current sell-off might end.

Our internal indicators are confirming the bearishness in the indexes. The 200-day Moving Averages Index is level-3 bearish, with a reading of 32%. By comparison, the 2011 correction saw this indicator fall to 23%, it fell to 18% during the 2002 bear market and it dropped to 4% during the 2008 market crash. The Advance/Decline Index remains level-1 bearish, and the Cumulative Volume Index is level-2 bearish.

Mimicking the indexes, only three of the nine major S&P sector funds are above their 200-day moving averages, the same three that were above their 50-day averages a week ago. Additionally, volatility indexes continue to spike higher.

Not surprisingly, Treasury bonds (TLT) continue to rally. TLT is actually approaching striking distance of its all-time high, an unfathomable occurrence at the beginning of this year, when almost everyone believed that interest rates had nowhere to go but up. Instead, rates have collapsed. TLT stays bullish above $117. Meanwhile, junk bonds continue to plunge, although they could find some support at current levels. But their yields remain historically low, implying more selling to come for junk bonds.

The dollar is continuing the pullback it fell into a couple weeks ago, but remains comfortably bullish. A strong dollar is a double-edged sword, as it benefits commodity buyers, but hurts the profits of U.S. companies that do business overseas.

The lower commodity prices can be seen in the charts, as copper (CU), gold (GLD) and oil (USO) remain in bearish trends. In fact, USO might be about to break below multi-year support in the $30 area on continued weakness in oil prices. The combination of lower commodity prices and lower interest rates is beneficial for the U.S. economy, but the real implication is that the global economy could be heading for major trouble. And that would eventually drag down the United States with it.

With stock indexes and indicators becoming even more bearish, options traders should continue to buy put options while reducing call holdings. And it could still be a while before stocks get their footing underneath them, as we are only halfway through what is usually perceived as a weak month of October. U.S. mid-term elections generally set a positive tone, so a short-term reversal of the current negative sentiment could be approaching, but option traders should remain cautious.

Keeping in mind the current bearish outlook for both oil prices and equities, today’s recommendation is for a put option on Baker Hughes (BHI), the premier oilfield services company based out of Houston, Texas.

Buy the BHI Jan 40 Puts (BHI150117P00040000) at $0.80 or lower. After entry, take profits if the stock price hits $46.40 or the option price hits $1.80. Exit if the stock price closes above $54.80.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/10/trade-of-the-day-baker-hughes-bhi-oil-prices/.

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