Our stock market index indicators are now giving bullish readings; as has been the pattern recently, this is a complete reversal from last week‘s bearish readings. But signs continue to emerge that this current volatile patch we’re seeing may be on the verge of abating.
One positive sign is that the Dow has rebounded far enough to snap its recent “lower highs, lower lows” trading pattern. And the most positive sign is that even with the wildly volatile swings bouncing the indexes above and below their 50-day moving averages on a weekly basis, they have managed to remain above their 200-day moving averages the entire time. So, the longer-term underlying trend has not changed from bullish.
Our internal indicators are also pointing to a less volatile future. The 200-day Moving Averages Index has climbed back to level 3 bullish, and the Cumulative Volume Index and Advance/Decline Index are level 1 bullish. (For reference, level 1 is the strongest reading, level 3 the weakest.) Eight of the nine major S&P sector funds are level 1 bullish, up from four of nine last week. And the one holdout, Energy (XLE), has popped back above its 50-day moving average to garner a level 3 bullish reading. Many analysts blame the current stock market volatility on the energy sector, so improvement by XLE would go a long way toward settling things down.
Treasury bonds (TLT) have pulled back over the past week, another sign that volatility may be starting to chart a smoother course. TLT has prospered lately as excess global liquidity seeks out safe havens in which to hide. But TLT has a long way to go before falling out of its bullish trend. The U.S. dollar (UUP) has also pulled back — but, similarly to TLT, still has room to fall before turning bearish. Junk bonds (JNK) have moved into a level 3 bullish trend, similarly to XLE. This implies that the months-long fear that lower oil prices might wreak havoc in the financial system may be abating. JNK and XLE have been moving almost in tandem during the entire oil price slide.
Commodities have arrested their slide, at least for the time being, but some of that can be attributed to the dollar losing ground. No signs have emerged that global demand for goods is perking up, so global growth questions still persist. However, evidence of volatility finally ebbing is also present in the commodity complex, as gold (GLD) continues to pull back in tandem with TLT and UUP. Those three have been the main beneficiaries of the “safe money” movement.
I recommend that you continue to hold an equal amount of bearish positions as bullish ones, and continue to take smaller positions than normal. Volatility may be showing early signs of easing…but, until that becomes a definite trend, it is best to err on the side of caution. That being said, with major U.S. stock market indexes regaining bullish readings and volatility perhaps beginning to ebb, options traders can begin to feel more comfortable with bullish positions like today’s trade.
Buy the Cooper Tire & Rubber Co (CTB) Mar 37 Calls (CTB150320C00037000) at $1.00 or lower. After entry, take profits if the stock price hits $38.10 or the option price hits $2.20. Exit if the stock price closes below $34.20.
Note: This is a relatively thinly-traded option chain, so you may need to be patient to get established at my recommended entry. Avoid buying a large number of contracts at once to prevent wild price swings; instead, enter your orders in smaller lots of five or 10 contracts.
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