It has been a dramatic week, in which the Dow Jones dropped 277 points in one day to the bottom of its persistent trading range, sending stock prices sinking, and then popped back up to end flat. However, at the core, not much has changed regarding my outlook from last week.
While the one-day reversal on Wednesday probably had a bullish tinge, my indicators are now squarely neutral. As Yogi Berra said, “It’s like déjà vu, all over again,” as the market remains stuck in its range. However, I continue to lean toward the bearish camp over the longer term. Though we may get a temporary uptick in stock prices as the indices make their way back to the top of the channel, ultimately, my projection is that we’ll stay stuck in this range until the market breaks down through it, leading to a correction in September or October.
We have also seen China accelerate the currency war this week. In the past three days, China has devalued its currency (the yuan) each day, which tells us that the Chinese economy is in more trouble than we might think. Historically speaking, currency wars never end well. While we’re in somewhat uncharted waters in this case, we saw a similar Asian currency devaluation situation in 1997, and the global markets and stock prices dropped sizably after that.
Oil is continuing its slide and, while there is renewed talk of an interest-rate increase, my feeling remains that the earliest the Fed will potentially increase rates is December. If that’s the case, I believe it will be by a minimal amount.
U.S. traders are in the middle of the summer, and the market has basically gone to sleep. We’ll continue to take our cues from the market and analyze the charts and stock prices, so trade a little bit lighter than normal and keep your trades skewed to the downside, while holding a few select bullish plays.
This week, I want to focus on a put trade in Time Warner (TWX) that my system says has a high probability of resulting in profit.
Buy the TWX Oct. 16th $72.50 Puts options at $1.30 or lower.
TWX is currently trading around $79, but remember that TWX doesn’t have to hit the $72.50 strike price for us to profit. As TWX continues its slide, the value of the put will increase.
After entry, take profits if TWX hits $73.30 or the option price hits $3.10. Exit if TWX closes above $81.80.
InvestorPlace advisor Ken Trester brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. It’s the perfect ‘bridge’ between investing in ordinary stocks and the turbocharged world of options trading.
Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990. Try Power Options Weekly today and receive 2 weeks for the price of 1 for only $19.95.
