The market traded sideways throughout last week before making a break toward the top of its trading range. The good news is that most of the major indices have cleared their range ceilings. The bad news is that the small-caps are still struggling.
And on Thursday, the Dow Jones Transportation Average (DJT) fell below its 200-day moving average (again) to test its April low just below 8,550. The importance of the Transports holding their recent lows has a lot to do with Dow Theory. Old school traders like to see both the Dow and the Dow Transports making new highs in tandem in an overall bullish market. Obviously, this is not happening with the blue-chips near all-time highs while the Transports are planted below their 200-day moving average.
The Dow and the Transports tried reaching new all-time highs together back in February and March. There has been a major divergence between the two indices for nearly two months, so this is not really “new” news.
While the suits-and-ties seem worried that the two indices aren’t trading in sync, I’m not too stressed, as the Dow Jones itself is not all that industrial these days. Although the blue-chips and the Dow are comprised of just 30 stocks, over the decades, the industrial stocks have been replaced with banking, tech and other “sector” stocks.
There are 20 stocks that make up the Dow Transports, and they include railroad, trucking and airline companies. By market cap, FedEx Corporation (FDX), United Parcel Service, Inc. (UPS) and Union Pacific Corporation (UNP) make up the top three stocks in the index. UNP is below all of its major moving averages. However, the other two, FDX and UPS, have cleared their major moving averages, and this is a bullish sign.
I don’t usually trade options on stocks over $100 because they can be extremely expensive at times, or pricey, which is the word I like to use. Having said that, I did sneak a peek at the option chains for UPS, as I love the breakout, and it is a stock I have followed for decades. Friday’s close above $102 was bullish, and a move above $104 could lead to a run at its 52-week high north of $114.
There are weekly options that trade on UPS for under $1, but weekly options can be thinly traded and often have wider spreads. Time decay is much shorter in weekly options, which is why the premiums are a little less expensive.
For example, the UPS May weekly 105 calls that expire this Friday (UPS150522C00105000) can be considered “cheap” at current levels, around $0.10. However, for them to be “in-the-money,” UPS shares would need to clear $105.08, technically, for the trade to break even. It’s possible, but it would be a big risk for a five-day bet.
Instead, bullish traders can look at the UPS June monthly 105 calls (UPS150619C00105000) as a much better “option,” as they would allow the trade more time to play out. If shares trade to $106.20, technically, by mid-June, these options would double from current levels at about $0.60, as they would be in-the-money by $1.20.
If UPS shares can rally to $111 by mid-June, the UPS June 105 call options would be worth at least $6, which would represent a 10-bagger.
I wanted to see more follow-through from the market on Friday after Thursday’s nice surge, but the fact the blue-chips closed up while the VIX finished lower were both positive signs. The technical picture hasn’t changed and, while it could at some point, it appears that the market is still on track to challenge fresh all-time highs.
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