After the sharp spike in the major indices this week, my indicators have turned bullish, but that doesn’t mean much to me in this bear market environment.
Beginning last Friday, we saw a three-day short-covering rally in which the S&P 500 moved higher by over 5%. As I have pointed out in recent issues, this is exactly the kind of upside move I would expect to see in a bear market, as it is not unusual for sharp, multi-day rallies to materialize within an overall bearish trend.
Of course, when a market gets really oversold, like it did last week, it’s typical to see these kinds of rallies. In other words, this week’s bullish action is characteristic of a dead-cat bounce, so I would be extremely cautious about going long the market at this point.
Despite my bearish stance, I do recognize that there were concrete factors that sparked this rally. One of the most significant was that Saudi Arabia and Russia agreed to cap their oil output as long as other large oil-producing countries join them. Iran, however, did not commit to a production freeze, so the handshake deal could fall apart and send oil prices lower once again.
Ultimately, I don’t think Russia and Saudi Arabia will follow through with the agreement for a different reason, which is that the two countries simply need to keep pumping just to pay down their massive debts. All of this is occurring within a global economy that is more indebted than ever, so it is not a positive sign overall.
I will say that I think oil is trying to make a complex bottom, which suggests that it’s forming a general floor of support. However, that floor is pretty shaky, and it is still a real possibility that we might eventually see a complete capitulation and another leg to the downside before a true bottom has been made. I call these kinds of situations volatile bottoms, so anything can happen in regards to oil, but I don’t think it’s out of line to predict that we could even see crude trade as low as $15 per barrel.
Despite this latest rally, we are irrefutably in a bear market, as we continue to see lower lows form on the charts of the major indices. Therefore, my advice is to buy put options, inverse ETFs or other bearish investment vehicles at the peaks of these relief rallies when they are relatively cheap. And, given the continued instability in the energy market, today’s bearish trade in that area is looking particularly compelling.
Buy to open the Cheniere Energy, Inc. (LNG) Jun 22.50 Puts (LNG160617P00022500) at $1.35 or lower. After entry, take profits if the stock price hits $24.60 or the option price hits $2.60. Exit if the stock price closes above $31.60.
If after three days you still have not gotten the position filled, cancel the order, as the profit probabilities may no longer be valid.
Additionally, if an 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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