Trade of the Day: JinkoSolar (JKS)

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The rallying action we’ve seen this week is what I expected, as I noted that the beginning of a month usually has a bullish bias. But that doesn’t mean anything has changed. Despite a slight improvement in my indicators, which are now neutral to bearish, I remain quite bearish – I have a new put trade in JKS for you below.

While you may hear the talking heads say the market needs to test the Aug. 24 lows again, my expectation is that the indices will go lower than that. When an index finally breaks out of the kind of trading range we were in for most of the year, it acts like a coiled spring that explodes when released. In this case, the energy behind that explosion is likely to be to the downside.

While we have this temporary optimism in the market, it’s also an opportune time to reflect on your longer-term stocks and to cut any under-performers loose. I also recommend opening covered calls on any stocks that you do want to own for the longer term. And, of course, buy puts into rallies.

As bearish as I am, there are things I’m watching to let me know if a break out may be coming instead. One of those clues would be a meaningful break above 2,000 level on the S&P 500. When I say meaningful, I mean sustained trading above 2,000 on significant volume. I don’t think we’ll see that any time soon, but, if we do, I might change my bearish tune.

I’m also looking closely at U.S. treasury bonds. When the market made its sharp decline, U.S. Treasury bonds, via the iShares 20+ Year Treasury Bond ETF (TLT), hardly moved at all. After the sucker punch to the market, we really should have seen U.S. bonds increase in value as investors made a “flight to safety.” However, that flight to safety did not occur in bonds, and we can expect to see them move lower.

My dark outlook on bonds is partly because I think we’ll see China and Japan, both of which hold significant U.S. bonds in excess of $1 trillion each, start dumping their bond holdings. Russia also holds a huge amount of U.S. debt. As these countries begin unloading their U.S. bonds, prices will decline — perhaps slowly, as foreign bond holders won’t want to sell to quickly to avoid moving the market — but eventually. Interestingly, we also did not see much of a flight to safety in gold, as gold prices have a lot of overhead resistance at these levels.

All of this tells me that small investors in general may not be anticipating any further declines. I hope you’re not among them and have joined me in adding insurance and defensive plays to your portfolio for the past several weeks.

But, speaking of China, the country hasn’t really fooled anyone by closing its markets for two days to honor the World War II anniversary. China, which hasn’t yet figured out how to stem the rampant selling in its markets, needed a few days to let things cool off with the contrived market holiday. It will be interesting to see how global markets react on Tuesday after the extended weekend. Remember, U.S. markets are closed on Monday, Sept. 7, to observe Labor Day.

As we head into the long weekend, historically, the markets do well the day before a holiday. But don’t get used to it. My forecast is that the worst damage will occur over the next month or two. Then, all things equal, November should usher in a period of strength.

Of course, all bullish bets are off if we head into a bear market in which the indices are down by more than 20% — which is a fair possibility at this point. I think there’s about a 40% chance we’ll enter a bear market, which usually last about nine months.

So, regardless of any short-term celebrations, I expect a major decline from here, so we want to be really careful. We’ll continue to remain defensive, and use any spikes on Wall Street to buy puts and other forms of insurance more cheaply. I have a put play for you now.

After a tough couple of months, JinkoSolar (JKS) made a slight rebound starting at the end of August, but the technical picture still looks weak. On Sept. 1, JKS made a bearing double moving average crossover of the 50- and 200-day moving averages. 

Portfolio Grader also downgraded it as one of the 6 Semiconductor Stocks to Sell Now.

Buy to open the JKS  Dec. 18th $14 Puts at $1.30 or lower. After entry, take profits if JKS hits $16.60 or the option price hits $2.00. Exit if JKS closes above $21.30.

If after three days you still have not gotten the position filled, cancel the order and watch for new recommendations, as the profit probabilities may no longer be valid. Additionally, if the option or its underlying stock does not hit its target, or if the stock does not close at or below its sell signal price within three weeks of entry, close the position. I do not recommend holding an option play for more than three weeks.

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