Our indicators are giving bullish readings, as they have for all of 2013 so far. But following three weeks of generally treading water, the indexes have pulled back over the past couple days and now look like they might be preparing to head lower. In fact, at Thursday’s close short-term support levels were being threatened, and if more selling ensues today, a quick fall to the 50-day moving averages will likely be in store.
We’ve been tracking those moving averages in this space for several weeks. Here are the current numbers to be aware of: The Dow will remain in a primary bullish trend relative to its key moving averages as long as it stays above 13,660, the S&P 500 above 1480, and the Nasdaq above 3120. With central banks remaining in accommodative modes, we expect those moving averages to hold as support barring an unforeseen calamity.
Our internal indicators are reflecting the recent weakness being shown by the major indexes. The 200-day Moving Averages Index, Advance/Decline Index and Cumulative Volume Index remain bullish, but the 200-day Averages Index could fall below its 50-day moving average as soon as tomorrow. A sub-indicator focusing exclusively on the Nasdaq has already made that move. In addition, seven of the nine major S&P sector index funds are bullish, compared to the nine of nine in recent weeks, as the Materials and Technology sectors have fallen below their 50-day moving averages.
The struggle in stocks is also evident in safe haven assets U.S. Treasury bonds and the U.S. dollar. We’ve been tracking the iShares Barclays 20+ Year Treasury Bond ETF’s (NYSE:TLT) recent struggles with support levels, and for now it looks to have found support at $116. It could rise to $119 before meeting resistance. The new player in the game is PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP), which a few weeks ago looked like it had broken below key support but instead has rebounded sharply. In fact, it has crossed back above both its 50-day and 200-day moving averages. The rallies by TLT and UUP will likely stay in place until a resolution to the “sequestration” question in the U.S. is made.
With our indicators beginning to weaken, options buyers should lighten up on the call side. Buy fewer calls, and continue to prune your current call positions. And step up your put buying, primarily as overall portfolio insurance but also to profit in the event the indexes breach key support levels or sequestration and the resulting fiscal drag is allowed to happen.
One put option that’s ripe for the picking is Atlantic Power Corp. (NYSE:AT). At only 50 cents, they’re undervalued, which lowers the amount of capital you would put at risk.
Recommendation: Buy AT Apr 10 put options at 50 cents or lower, when the stock Price is around $10.30. After entry, take profits if the stock price hits $9.30 or the option price reaches $1.00. Exit if the stock price closes above $10.90 or the option price falls to 30 cents.
InvestorPlace advisor Ken Trester is editor of the popular Maximum Options program. 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 Maximum Options today for 2 months for only $99.