Trade of the Day: Dow Chemical (DOW)

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This week, about one-fifth of the roughly 2,800 stocks on the New York Stock Exchange (NYSE) hit new lows, obviously not a good sign. And on Monday alone, the new lows totaled 435, the most since Oct. 15. That tells me the Advance/Decline Line is not good.

This has analysts looking for what’s known as the Hindenburg Omen, which is triggered when the number of stocks making new 52-week lows is greater than the number of stocks making new 52-week highs. We’re not there yet, but when so many stocks hit new lows and their charts indicate they are breaking down, it signals that something is amiss.

Continued weakness in NYSE and the Dow Jones Transportation Index and concerns over the strength of emerging markets are also influencing the negative tone of the market. China has been a worry for the past several weeks, but, as bad as China’s problems are, Brazil is in much worse shape. Brazil’s debt was recently downgraded to just one notch above “junk,” which is not good because it is a big part of the world economy. The downgrade is partly due to Brazil’s status as a resource economy, with heavy focus on agriculture, mining and metals, and commodities across the board are in a bear market. So, with the price of sugar, corn, gold, silver and other precious metals tumbling, Brazil is in a tough position.

Oil prices should also continue to trend lower, but I speculate that the big oil producers that have been hammered lately, such as ConocoPhillips (COP), appear to be forming a bottom. This is the point at which big oil companies could start buying up small firms that are close to bankruptcy and pick up some assets.

None of this means that we’re likely to break up or down out of this sturdy trading range any time soon. Looking at a chart of any of the major indices, one can see that they keep bouncing back and forth between their support and resistance levels. It appears to me that when the computerized traders see the indices drop to their 200-day moving averages, they jump into the market and start buying, which sends the averages back up. However, it’s really just a few stocks that are leading those rallies. Big names like Amazon.com (AMZN), Facebook (FB) and Apple (AAPL) are carrying the whole market.

With a lack of conviction in stocks across the board and several ominous factors looming over the market, traders should remain prepared for a continued downdraft while holding a few select bullish positions for the time when this market makes a decisive move.

NYSE name Dow Chemical (DOW) is a stock I’ve traded many times in my four decades as a professional. DOW sold off heavily in mid-July, and don’t let a recent rebound after its earnings report fool you.  In recent weeks, DOW has made several bearish crossovers of the  200-day, 21-week and 50-week moving averages. It also put in a bearish Double Top pattern on July 23.  The best way to play the short-term in DOW is with a put option.

Buy the DOW Dec 18th $42 Put at $1.35 or lower.  After entry, take profits if the stock price hits $44.00 or the option price hits $2.40. Exit if the stock price closes above $49.10.

Also, if you took my recommendation for the Lockheed Martin (LMT) calls, another NYSE name, last week, the options are now trading at my target of $3.60, so go ahead and take your 125%-plus gains.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/dow-nyse/.

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